Earnings Management and its Determinants of Corporate Companies in Ethiopia

Abstract

Financial statements are required to reveal the companies underlying reality to be effectively aided the stakeholders in their business decision making. Regardless of stricter accounting rules and standards like GAAP and IFRS, numerous corporate scandal chaos occurred, particularly after the Enron plot. Ethiopia is a country where the financial reporting is regulated by undefined accounting and auditing principles and a country where no formal stock exchange market more likely to induce corporate managers not to present the underlying reality of firms’ financial performance and position. Hence, the study examined the level of earnings management and its determinant factors in Ethiopian non-financial corporate companies. The Modified Jones Accruals Model (cross-sectional) was utilized to detect the degree of earnings management of 45 firms for the year between 2011 and 2017. The random-effects panel regression model result reveals that firm assets size, sales size, firm age and profitability significantly influences the downward earnings management practices of sampled firms. However, contrary to numerous findings, liquidity position and leverage status is not significantly influences. Therefore, financial statement stakeholders such as investors, creditors, tax-officers, auditors, and academics recommended to scrutinizing the financial reports of larger asset size and profitable firms; they are more likely engaged in manipulation of accounts, in detail while they are using the reports to make informed economic decisions. The study expected to expand the existing body of knowledge and provide additional empirical evidence in the area of earnings management and accounting research at large.