Did we Constrain Managers’ Attempts to Manipulate Earnings: Insights from the Relevant Literature

Abstract

Since the numbers game speech by Levitt (1998), earnings management is becoming one of the most cited accounting research areas. The objective of this paper is to review the main themes highlighted in the relevant literature. Studies provided some contradicting points of views regarding earnings management definition, incentives, and techniques. Earnings management, in general, tends to be undesirable as it distorts the financial reporting process and subsequently leads to lower earnings quality. Therefore, regulators have invested time and effort seeking solutions to this problem (Examples include regulations regarding auditor independence, audit firm tenure, auditing standards, and accounting standards). In addition, accounting and auditing research investigated factors and mechanisms, which lead to mitigate or constrain earnings management. Earnings management is classified into accruals earnings management, real earnings management, and classification shifting earnings management. The focus of this paper is on earnings management mitigation. Different studies provided some evidence on the role of each of investor protection, corporate governance, external auditing, and accounting standards in mitigating earnings management.