Identify the Earnings Management Tool Used in Free-Usury Banking in Iran: Comparative Evaluation of the Importance of LLP and STGL in the Cornett Approach

Document Type : پژوهشی

Authors

• Mahdi Ghaemi Asl
• sadegh bafandeh imandoust

No. 43, Mofatteh Ave., Postal Code: 15719-14911, Tehran, Iran

https://doi.org/10.22067/mfe.2021.16463.0

Abstract

Extended abstract
1- INTRODUCTION
 Accounting information in financial markets is used as a basis for capital allocation decisions. As a result, the effects and consequences of accounting information quality are of interest to investors, managers, legislators, and standards developers. Separation of ownership from control in companies leads to information asymmetry between owners and managers. In addition, the theory of rational expectations and the theory of agency show that owners (investors) and agents (managers) have different interests that cause information asymmetry of the type of moral hazard. Control over the cost of borrowing contracts and debt deferral costs are effective incentives in earnings management. Opportunistic managers are therefore motivated to manipulate or manage profits to reduce the likelihood of breach of debt. Also, when business units fluctuate economically and are under adverse pressures, managers try to adjust the company's situation directly or indirectly to affect the amount of profit reflected in the financial statements and cause a positive outlook. Be users of financial statements, especially investors. The set of these measures is interpreted as profit management, which has both positive and negative aspects. The main question of this research, which has an exploratory approach, is which of the profit management tools in the banking system are mainly used by the managers of Iranian banks?
2- THEORETICAL FRAMEWORK
 The issue of profit management in accounting was formed from the beginning of the twentieth century onwards by various researches by accounting experts. Each of these researches has dealt with the subject from specific dimensions and with different expressions such as profit manipulation, profit smoothing and finally profit management. Jensen and McLean have proposed the theory of representation; they defined corporate executives as "agents" and shareholders as "agents". One of the main hypotheses of agency theory is that "agents" and "agents" have conflicting interests and that agents do not necessarily make decisions in favor of agents. According to them, management motivations are in the direction of personal interests, which are the opposite of maximizing the wealth of shareholders. Bank managers, like managers in other industries, have incentives to adjust profits and maximize the wealth of the bank or the manager himself. The only difference is in the methods used to employ the tools in profit management. Of course, since the banking industry is heavily controlled and supervised, it is less likely to manage profits. Nevertheless, concerns about the issue of profit management in banks have received widespread attention in recent years, following the revelation of the collapse and the banking crisis.
3- METHODOLOGY
 This research is an applied research and in terms of inference method, it is a descriptive-analytical research. In this research, Kasnik model and special regression methods of unbalanced panel data have been used to calculate and evaluate earnings management in the banking system. In this study, the Cornet model has been used to identify the tools used by bank managers to manage profits. Summarizing the various views on earnings management, it can be interpreted that earnings management is any change, whether a decrease or increase in the reported earnings of the firm without creating appropriate cash flows by management and with the aim of influencing the decision of users of financial statements, including the government and regulatory bodies or investors and shareholders and the company's internal assemblies, financing institutions or other creditors and stakeholders.
4- RESULTS & DISCUSSION
In this section, the results obtained during econometric operations in accordance with the research stages are reported. Considering the continuous trend for each of the sample banks, it can be concluded that mainly bank managers use profit management in one direction for several consecutive years. Of course, this trend is not true for all sample banks; but most sample space banks have followed suit. After estimating the Cornet model, the overall significance of the model and the individual coefficients of the variables have been investigated and confirmed. According to the calculations, the variable cost of doubtful receivables with a coefficient (-0.81) compared to the variable income from investments with a coefficient (0.228) has a stronger effect on the earnings management index and to reduce it. Therefore, the cost of doubtful receivables is introduced as a major tool used by bank managers to manage profits in the Iranian banking system.
5- CONCLUSIONS & SUGGESTIONS
 In this research, two goals have been pursued; The first goal, which was to study the earnings management index in the banking system, was estimated using the Kasnik model and by analyzing the trend of changes in optional accruals, the hypothesis of using earnings management methods by bank managers was confirmed. The second purpose of this study was to identify the tools used by bank managers to manage profits and to introduce the main variable used by managers. This goal was achieved by estimation the current model between earnings management index as a dependent variable and LLP and STGL variables as independent variables. The results indicate that the variable cost of doubtful receivables (LLP) has much more application in earnings management by bank managers in the Iranian banking system than the variable income from investments and contributions (STGL). In view of the above, it is recommended that regulatory bodies in the banking industry, such as the Central Bank, the Monetary and Credit Council, as well as statutory auditors or internal auditors of banks and credit institutions, focus more closely on the reported amount of doubtful receivables. On the other hand, the owners of investment accounts do not have direct access to the bank's performance information, and yet their final return depends on the bank's performance. Therefore, depositors must also receive a separate report in order to perform the managerial duty of management.

Keywords

• Accruals
• Banking
• Earning
• Earnings Management
• Loan Loss Provisions

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