Stock options earnings management and corporate governance dubai
The study recommends having a small size board, not to separate between the role of chairman and CEO, and that increasing board activity will reduce level of earning management. What is Corporate Governance? Conclusions and Recommendations Appendix Note. These scandals were seen and witnessed in the western world, which mostly included big names of business world like Enron, WorldCom, and HealthSouth. The effects of such financial and management scandals were also noticed in UAE economy majorly because of its rapid growth in the corporate world.
The increased in economic growth attracted many investors in UAE to invest in companies. The number of sophisticated investors is increased and therefore, the importance of financial reporting is gaining much attention. Many major empirical studies were conducted to find the reasons regarding Corporate Governance implementations and fair disclosures of financial positions and they have found that the earning management phenomenon prevailing inside the firms Goncharov, .
Earning management is used to paint the financial reporting into favorable picture for some specific reasons Loomis, . Therefore, after such incidents this grey area attained much consideration all around the globe by the accountants and regulators, which can be easily witnessed in the accounting literature.
Earning Management not only masks the financial picture but also vague facts for the stakeholders. Stakeholders deemed accounting information to be relevant and valuable because of its relation with equity market value Kallunki and Martikainen, .
These accounting information reflected in financial statements are always considered as bench mark by shareholders for extrapolating future returns Dechow, P. Companies reported their earnings for giving valuable information to shareholders in market who used accounting numbers for future prediction. The earnings of the company and future expectations about the firm value are always related and it has been proved by empirical researches Liu and Thomas, . The accounting researchers have found that low earnings reporting have association with low information content of the financial reports showing significant management manipulation Kallunki and Martikainen, .
In the market base researches it is often found that the relationship is not positive and note worthy between earnings disclosure and stock returns. A comprehensive review of Lev  can be seen in which negligible relationship of earnings disclosures and its explanatory value effect on shares returns were noticed. However, Lev  argued that the in all likelihood reasons for the poor factual execution reliably found in the disclosed profit exploration is inclination, presented by accountants who give estimation rehearses or inventively "abuses" the process of income estimation.
Thus, author suggests that the investigation on outcomes of income related reporting must be controlled and make it a central part of the income quality examination plan Lev, .
This has prompted an extensive and developing the collection of experimental investigations and researches that examines the presence of earning management. Accordingly, income quality gets to be sketchy when directors have a motivator to oversee reported profit deftly Healy and Wahlen, . This research is going to study the following research question: Do the corporate administration by Corporate Governance and external audit monitoring influences the quality of earning management in financial organizations of UAE?
This research makes contribution in different ways. First there is few prior study available on the earning management in United Arab of Emirates, this research will bring some improvement and updating in earning management research in UAE to add to the existing literature.
Secondly this study will examine the impact of corporate governance and external audit on publicly listed company in the UAE to explore the viability of the corporate governance combined code on constraining earning management for to Corporate governance is a wide term that explains the sequential steps, traditions, policies, ethics, legal compliance and the bodies that guide, supervise, direct and control the companies.
It encompasses various actions of the governing parties in administration and follow-up of their organizations. It is a business process, which is driven as per ethics, and is value based.
It primarily aims at maximizing wealth of the organization by enhancing the income generation capacity Infosys, The main objective of the corporate governance is to offer opportunity to the wise, effective and risk bearing management in treading their organization to the path of long-term success Bhagat, S. The interests of the shareholders are conflicting with the interests of the managers. Originating from point of view of agency issue, corporate governance instruments are accepted to have positive effect to moderate the organization issue.
Corporate governance may be seen as the relationship between an organization's governance and shareholders. It is characterized as "the framework by which business enterprises are coordinated and controlled". It is broadly trusted that the usage of a decent corporate governance system presents organizations an organized way to better governance rehearses, powerful oversight and control instruments which prompt open doors for development, financing and enhanced execution Solomon, .
The public-sector is mostly controlled by the government of UAE. The highest authority in UAE is the regulatory bodies. Some of the important factors defining corporate governance are: Recapitulating the aim of the research study is: Do the corporate administration by CG and external monitoring compels earning management hones in the UAE?
The researcher took corporate governance as the variable explaining the corporate administration. It was so because corporate governance encompasses all the factors that are responsible for the administering the companies such as composition of board members, board activities, ownership structure and CEO duality.
Corporate governance provides the foundation of corporate management whose decisions, activities and power influences the overall performance of the company. Board activities reflect the extent and frequency of involvement of the board members in the management meetings and discussions. Further, ownership structure has been also bracketed under corporate governance since it will reflect the power and pecuniary interest of the owners of the company Geraldes Alves, S.
The ownership makes the individual accountable to their actions and decisions hence considerably influence the management. Lastly, CEO duality also impacts corporate governance since same individual is vested with the dual power of management as well as execution of the afire of the company. On one hand it could lead to coordinate efforts while excess power could lead to dictatorship and undermining the interests of other stakeholders Krause, R.
Henceforth, all these factors could substantially be associated with the performance of the company and perhaps be reflected in financial statements of the company.
Therefore, the researcher embedded these variables under the head corporate governance as an independent variable so as to study its impact on dependent variable i. So in simple, it is an activity to deceive by making numbers mystery and also cause harm financially and mentally. All the boards and auditors under the regulations of regulators are focused to seek and find the wrong doers by solving the puzzle of Earning Management before it convert into the fraud or embezzlement. The is a long debate for considering Earning Management as a crime because of the fact that crime must have 7 elements like commitment of crime occurred, responsible suspects, instrument of crime, suffers of the crime, reason behind this motive and the person who carried out this act and last is explanations from different aspects.
Moreover Fraud or embezzlement can be defined as "the intentional, deliberate, misstatement or omission of material facts, or accounting data, which is misleading and, when considered with all other information made available, would cause the reader to change or alter his or her judgment or decision" NACFE, The major question one can arise when studying any UAE firm financial report, as this is not possible to reply unless performed the accounting research.
This problem arises primarily because, to identify whether earnings have been managed, researchers first have to estimate earnings before the effects of earnings management. The most common phenomenon prevailing behind the EM is the undue favor to the management in the form of compensation or distribution of unfair profits to the higher tier employees of the company. Burns and Kedia, ; Cheng and Warfield, . Earning Management should not be mingled up with the accounting choices as Fields et al.
The primary aim of the researcher was to identify, assess and measure whether the corporate administration by CG and external monitoring compel earning management hones in the UAE. Therefore, external monitoring has been explained by taking external audit as independent variable. The external audit will gauge and oversee the activities and financial performance of the company and further verify the validity and effectiveness of its accounts and financial health Lin, J.
External audit will act as a watchdog over the company performance and will perhaps affect the earning management of the company. It is so because a continuous evaluation and appraisal would be performed on the company performance free from internal control and biasness and will thus necessitate the management of its financial income and position.
Further, the external audit parameter has been explained with the help of three sub variables such as: These variables have been chose owing to its substantial impact over the variable external monitoring.
Audit fees indicate the extent to which the services are being compensated for the amount of fees thereby affecting the external monitoring in both ways. It could lead to control on results on one hand or encourage the efficiency of the company on the other, hence the need to incorporate in the model to study its individual impact on earning management Chi, W.
Next, audit tenure indicates the time period for which the external auditing firm is associated with the company. Again it could impact the earnings of the company in dual ways. The long-term relationship could establish controls and biasness while on the other could improve the efficiency owing to the trust and reliability accorded with the audit firm Davis, L. Lastly, international auditing firm relationship with the audit firm could impact the financial performance of the company.
On one hand, it could give global exposure to the firm and thus increasing the market value of the company on international standards compliance while on the other hand it could lead to tough competition, leakages of information and involvement of multiple cross border parties and affect the finance of the company Lin, J. It additionally gives a depiction and investigation of the techniques connected with collection and setting up the information considered important to verify the presence of a relationship between income administration as earning management and the characteristics of corporate administration furthermore, the outside reviewer as external audit.
This study is conducted to use quantitative approach to study the relations and impact of proper framework of CG and strict external audit the activities of EM. For finding earning management the specific events are used specially the discretionary accruals and a set of independent financial and non-financial variables of the companies listed in ADX by their deep data analysis. The current research examine the variables using generalized linear models GLM , which extend the frame work of linear model to a wider range of response types, including categorical, binary, and skewed continues responses.
This allows a common approach to statistical inference in the fitting and testing such models as well as diagnostic checking. The sample chosen for the current research study was fifty. In order to understand the relationship of proposed variables the data was collected from the secondary sources available in annual reports of the various finance companies registered under Central Bank of UAE and under UAE Stock Exchange. It comprised of various finance companies namely, banks, insurance companies and investment companies.
Another condition checked to reach the sample size of the subjects are their confidence level index, calculated using Sample Size Calculator developed by Creative Research Systems. The margin error necessary to obtain a value closer to the population was calculated and the value obtained was Since the study pertained to time series analysis, therefore the data had been collected over the period of five years i.
Our statistical approach in measuring and decomposing accruals is based on the method proposed by Jones, J. So the NDA were mathematically expressed by equation: These values differ before and after the manipulation, which is explained by regression analysis. Discussions and Result 4. Correlation Analysis Correlation is a statistical tool that measures the existence, degree and direction of relationship across the variables.
The current study such as discretionary accrual, ownership structure, board members, board meetings, CEO duality, audit fees, tenure of audit firm and lastly international auditing firm relationship with the sample company see Appendix. Empirical Results Linear regression analysis is a statistical technique of estimating the dependent variables with the establishment of its relationship with various independent variables or predictors Adejumo, A.
The linear predictor then consists of a design matrix that contains dummy variables for the different margins of the table. The researcher ran this model on the data set that revealed the following results: Generalized Linear Model dependent variable: As it is shown on the table, the coefficient of CEO duality and board activity indicate negative impact on Discretionary accruals at 5 percent level of significance.
Moreover, the coefficients of owner structure and board size indicate positive impact on Discretionary accruals at 5percent level of significance. The effect of the findings is that an increase in number of Owner structure will cause 0. The study suggest that monitoring seems to be weaker at higher managerial ownership levels and, therefore, a positive association is documented between the managerial ownership variable and earnings management which has been supported by Koh  , Yeo, Tan, Ho, and Chen  and Teshima and Shuto .
Does Corporate Governance matter. Corporate Governance and Earnings Management. They suggested that managers who are given stock options will. Short Communication — Creative Accounting. Scribd is the world's largest social reading and publishing site. Financial Accounting in an Economic Context,. Presents a new corporate governance theme that is. Bedjaoui became fascinated by the ways in which corporate governance, risk management and regulatory.
The stock market relationship between Mainland China and Hong Kong. Corporate Governance and Earnings Management:. Professor Indra Abeysekera Professional Profile In this article, the authors fill a gap in the legal literature surrounding post-Enron corporate governance reform by focusing on the need for enhanced shareholder. Corporate governance mechanisms and web based investor Implications of the Sarbanes-Oxley Act for Public. Earnings management is a term commonly used to describe.