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Earnings Management, Weak Internal Controls, And Firm Size

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  • Yousef Jahmani
  • Suman Niranjan

Abstract

We investigate the association between earnings management and internal control weaknesses as well as the association between earnings management and firm size. We use two samples: one from large accelerated filers, matched with the same number of firms with strong internal control, and the other from accelerated filers with internal control weaknesses, matched with the same number of firms with strong internal control. Using a modified Jones model, we determine that firms with weak internal control manage their earnings more than do those with strong internal control. The test result is robust for accelerated filers but only modest for large accelerated filers, suggesting that large firms manage their earnings less than do other firms. The results suggest that firm size is an important factor in determining earnings management. The findings are important for regulators who may consider additional disclosure requirements for accelerated filers, non-accelerated filers, and smaller firms and auditors who may increase their scrutiny of financial statements of these firms.

Suggested Citation

  • Yousef Jahmani & Suman Niranjan, 2015. "Earnings Management, Weak Internal Controls, And Firm Size," Accounting & Taxation, The Institute for Business and Finance Research, vol. 7(2), pages 51-64.
    • Handle: RePEc:ibf:acttax:v:7:y:2015:i:2:p:51-64
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    References listed on IDEAS

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    Cited by:

    1. Tikkos Sitanggang & Titik Aryati & Bambang Pamungkas & Sukrisno Agoes, 2022. "The role of the audit committee to increase the influence of audit quality and internal control on earnings management," Technium Social Sciences Journal, Technium Science, vol. 29(1), pages 399-418, March.
    2. Murad Harasheh & Roberta Provasi, 2023. "A need for assurance: Do internal control systems integrate environmental, social, and governance factors?," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 30(1), pages 384-401, January.
    3. Dr.Muganda Munir Manini & Dr.Umulkher Ali Abdillahi, 2023. "Does the Internal Control Environment Drive the Performance of Cooperatives? A PLS-SEM Perspective," International Journal of Research and Innovation in Social Science, International Journal of Research and Innovation in Social Science (IJRISS), vol. 7(7), pages 721-745, July.

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    More about this item

    Keywords

    Earnings Management; Internal Control; Discretionary Accruals; Firm Size;
    All these keywords.

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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