CSR & Earnings Management: An Assessment of Firm Ethics


Purpose - This study aims to examine the effect of CSR disclosure on earnings management practices stated in accrual earnings management, real earnings management, and in aggregate practice (accrual and real).

Design/methodology/approach - Assisted with NVivo 12 Pro software, this quantitative study measures CSR disclosures of 186 annual reports made by 62 manufacturing firms listed on the Indonesia Stock Exchange (IDX) in the period between 2013 and 2015. Period coverage of 2013-2015 is chosen to keep consistency of applied regulation about CSR disclosure in Indonesia. The data are analyzed using multiple linear regression.

Findings - This study finds that firms with high CSR disclosures would have low levels of accrual and aggregate earnings management. There is no significant effect of CSR disclosure to real earnings management practice.

Research limitations/implications - The results of this study may provide additional literature to examine the effect of CSR disclosure on the practice of comprehensive earnings management (accrual and real). Data to measure real earnings management practices is not entirely available. There is a high chance of subjectivity in measuring the level of CSR disclosure.

Practical implications - For company, it can provide information regarding the  importance of CSR disclosure. For regulators, it can be a consideration to make strict rules related to CSR disclosure.

Originality/value - This study provide a comprehensive picture by examining the effect of CSR disclosure on all types of earnings management by the firm.

Keywords: CSR disclosure, real earnings management, accrual earnings management

[1] Bozzolan, S., Fabrizi, M., Mallin C. A., Michelon G. (2015). Corporate Social Responsibility and Earnings Quality: International Evidence. The International Journal of Accounting, 50, 361-396.

[2] Calegari, M. F., Chotigeat, T., & Harjoto, M. A. (2010). Corporate social responsibility and earnings reporting. Journal of Current Research in Global Business, 13(20).

[3] Choi TH, & Pae J (2011). Business ethics and financial reporting quality: evidence from Korea. J. Bus. Ethics, 103(3), 403-427.

[4] Cohen, D. A., Dey, A., & Lys, T. Z. (2008). Real and accrual-based earnings management in the pre- and post-Sarbanes–Oxley periods. The Accounting Review, 83(3), 757–787.

[5] Cohen, D. A., & Zarowin, P. (2010). Accrual-based and real earnings management activities around seasoned equity offerings. Journal of Accounting and Economics, 50(1), 2–19.

[6] Dechow, P., & Skinner, D. (2000). Earnings Management: Reconciling the Views of Accounting Academics, Practitioners and Regulators. Accounting Horizons, 14(2), 235-250.

[7] Dechow, P., Sloan, R., and Sweeney, A. (1995). Detecting earnings management. The Accounting Review, 70(2), 193-225.

[8] DeFond M.L., Jiambalvo J. (1994). “Debt Covenant Violation and Manipulation of Accruals”. Journal of Accounting and Economics, 17,145–176

[9] Diyanty, V. (2012). Pengaruh Kepemikan Pengendali Akhir terhadap Transaksi Pihak Berelasi dan Kualitas Laba. Fakultas Ekonomi dan Bisnis Universitas Indonesia: Disertasi.

[10] Fauzi, Hasan. (2009). Redefining CSR concept in Indonesia. The Jakarta Post. (http:www.thejakartapost. com, diunduh 1 December 2009).

[11] Garriga, E & Mele, D. (2004). Corporate Social Responsibility Theories: Mapping the Theory. Journal of Business Ethics, 53, 51-71.

[12] Healy, P. M., & Wahlen, J. M. (1999). A review of the earnings management literature and its implications for standard setting. Accounting Horizons, 13(4), 365-383.

[13] Hong, Y., & Andersen, M. L. (2011). The relationship between corporate social responsibility and earnings management: An exploratory study. Journal of Business Ethics, 104(4), 461–471.

[14] Kasznik, R. (1999). The Association between Voluntary Disclosure and Earnings Management. Journal of Accounting Research, 37(1), 57-81.

[15] Kim, Y., M. Park, and B. Wier. (2012). Is Earnings Quality Associated with Corporate Social Responsibility? The Accounting Review, 87 (3), 761-796.

[16] Kothari, S.P., Leone, A.J., Wasley, C.E., (2005). Performance matched discretionary accrual measures. J. Account. Econ. 39, 163–197.

[17] KPMG. (2015). The KPMG Survey of Corporate Responsibility Reporting 2015. KPMG International Cooperative.

[18] Laksmana I, Yang YW (2009). Corporate citizenship and earnings attributes. Adv. Account, 25 (1), 40-48.

[19] Lanis, R., & Richardson, G. (2013). Corporate Social Responsibility and Tax Aggressiveness: A test of legitimacy theory. Accounting, Auditing and Accountability Journal, 26 (1), 75-100.

[20] Litt, B., Sharma, D. S., & Sharma, V. D. (2014). Environmental initiatives and earnings management. Managerial Auditing Journal, 29(1), 76–106.

[21] Markarian, G., Pozza, L., & Prencipe, A. (2008). Capitalization of R&D costs and earnings management: Evidence from Italian listed firms. The International Journal of Accounting, 43, 246-267.

[22] McNichols. (2000). Research design issues in earnings management studies. Journal of Accounting and Public Policy, 19, 505-527

[23] Orlitzky, M., Schmidt, F. L., & Rynes, S. L. (2003). Corporate social and financial performance: A meta- analysis. Organization Studies, 24(3), 403–441.

[24] Prior, D., Surroca, J., & Tribó, J. A. (2008). Are socially responsible managers really ethical? Exploring the relationship between earnings management and corporate social responsibility. Corporate Governance: An International Review, 16(3), 160-177.

[25] Richardson, V. J. (1998). Information Asymmetry and Earnings Management: Some Evidence. http.ssrn. com.

[26] Richardson, V. J. (2000). Information asymmetry and earnings management: Some evidence. Review of Quantitative Finance and Accounting, 15, 325-347.

[27] Roychowdhury, S. (2006). Earnings management through real activities manipulation. Journal of Accounting and Economics, 42(3), 335–370.

[28] Scholtens, B., & Kang, F. –C. (2013). Corporate social responsibility and earnings management: Evidence from Asian economies. Corporate Social Responsibility and Environmental Management, 20(2), 95–112.

[29] Siregar, S.V.P. dan Utama, S. (2006). Type of earnings management and the effect of ownership structure, firm size, and corporate-governance practices: Evidence from Indonesia. The International Journal of Accounting, 43(1),1-27.

[30] Skinner, D. J., & Sloan, R. G. (2002). Earnings surprises, growth expectations, and stock returns. Review of Accounting Studies, 7 (2–3), 289–312.

[31] Zang, A. (2012). Evidence on trade-off between real activities manipulation and accrual-based earnings management. The Accounting Review, 87(2), 675-703.

[32] Zhao, Y. et al (2012). Takeover protection and managerial myopia: Evidence from real earnings management. Journal of Account Public Policy, 31, 109-135.