and misleading nancial reports to inuence investor and stakeholder decisions. According
to Schipper (1989), earnings management is the purposeful intervention in the external
nancial reporting process with the intent of obtaining some private gains by the managers.
Healy and Wahlen (1999) stated that earnings management occurs when:
[…] managers use judgement in nancial reporting and in structuring transactions to alter nancial
reports to either mislead some stakeholders about the underlying economic performance of the
company or to inuence contractual outcomes that depends on reported accounting numbers.
The process of earnings management practice can be construed as planning and controlling
the nancial reporting system to meet the management objective of misleading investors,
meeting analysts’ expectations, maintaining the economic growth projector or arriving at the
predetermined target income for their incentive pay (Leuz et al., 2003).
The recent focus on the topic of earnings management is a direct outcome of the sudden
collapse of large business entities over the past few years, including Enron (USA), WorldCom
(USA), Bank of Credit and Commerce International (UK) and Subprime Mortgage (USA).
Researchers and various statutory governing bodies in their studies found that weak
corporate governance systems and the presence of earnings management practices are initial
factors that lead to a weakening of the nancial health of rms and ultimately results in their
collapse. It has been identied that managers use discretion usually permitted by the
prevailing accounting standards and laws when using alternative accounting practices.
Available discretionary measures assist managers in manipulating nancial reports and in
their ability to produce the desired accounting numbers for investors and stakeholders by
hiding the actual facts. As constructive measures, various accounting reforms and
constructive governance structures have been introduced to improve the governance
environment and promote fair business practices, including the Organisation for
Co-operation and Development Principles OECD (1999), the Stock Exchange Listing
Standards, Sarbanes –Oxley Act (2000) and the International Financial Reporting Standards
rules. Researchers found that corporate governance, used as a measure to control earnings
management practices, improves the business environment and enhances the nancial
reporting quality. It has been appropriately noted that “good corporate governance simply
means good business” (OEDC, 1999). Corporate governance provides a structure for
directing and controlling the business with a higher level of efciency, transparency,
accountability and fairness. In addition, corporate governance practices include the
decision-making and controlling processes for a business. It provides an understanding of
the managerial structure of business rms, resource utilisation and various other issues,
including company law and business ethics (Adams et al., 2009). The various attributes of
corporate governance structure, including a board of directors, an audit committee,
independent directors, various other administrative committees within a board, owners
participation and director remuneration, are factors inuencing the rms’ decision-making
process and thus play an important role in controlling managers discretionary power,
earnings management practices and nancial reporting process (Davidson et al., 2005; Mitra
et al., 2005; Buniamin et al., 2012).
There is extensive literature available on earnings management practices by rms. A
large amount of research has been focused on developing measures and models to
calculate the amount of earnings management practices (Jones, 1991; Dechow et al., 1995;
Burgstahler and Dichev, 1997;Kothari et al., 2005). A good amount of literature available
concentrates on identifying control measures for restricting earnings management
practices focused on corporate governance as a primary control measure (Baetov et al.,
2000; Bedard, 2001; Ayers et al., 2006;Sarkar et al., 2008; Miyamoto and Higuchi, 2007;
Dechow et al., 2012). We also nd a number of research studies that focus on