An analysis of the factors that influence earnings management in South Africa: evidence from the JSE top 40 listed firms.

Abstract

In recent years, earnings management practices among South Africa’s listed companies has increasingly drawn scrutiny from regulators, stakeholders and investors. This concern stems from a growing number of corporate scandals that have highlighted potential manipulation or misrepresentation in financial reporting. The aim of this study is to examine factors influencing earnings management by observing the top 40 listed companies in South Africa. This study employed a quantitative research approach by first measuring discretionary accruals for South Africa’s top 40 listed firms and then examining the factors influencing them. The study used the fixed effects, random effects and Robust Regression models. A dataset of 23 companies listed on the Johannesburg stock exchange top 40 for a period of 5 years. The dataset comprised of 115 observation which was obtained from IRESS database and company websites, to measure discretionary accruals for South Africa’s top 40 listed firms and factors that influence earnings management. The empirical results show a significant negative association between the proportion of property, plant and equipment and the discretionary accruals among South African firms. In practical terms, companies with a larger share of tangible, capital intensive assets appear less inclined, or less able, to manipulate reported earnings through accrual choices. One likely explanation is that of a sizable physical asset base generated with depreciation and diminishing charges that are relatively transparent and easy for auditors and investors to verify. This verifiability narrows managers’ accounting discretion and by extension, reduces both the opportunity and the incentive to engage in accrual-based earnings management. The result for objective two show that earnings management has a strong positive effect, implying that it boosts reported performance; and leverage a significant negative effect, suggesting that highly leveraged firms tend to perform worse. It is recommended that JSElisted firms should strengthen corporate governance focusing on board structure, chief executive director tenure management, and internal controls as they grow to reduce earnings management, enhance transparency, and maintain investor confidence in South Africa’s capital markets. The discretion and judgement allowed to financial statement preparers should be limited to curb earnings management practices. This study contributes to the ongoing discourse on how JSE-listed companies manage financial reporting in relation to earnings management.