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Management of income statement variables to report small positive earnings numbers

B. Brian Lee (Prairie View A&M University, Prairie View, Texas, USA)
Haeyoung Shin (Department of Accounting, University of Houston – Clear Lake, Houston, Texas, USA)
William Vetter (Prairie View A&M University, Prairie View, Texas, USA)
Dong Wuk Kim (Accounting Department, Jeju National University, Jeju, Republic of Korea)

Asian Review of Accounting

ISSN: 1321-7348

Article publication date: 6 February 2017

1473

Abstract

Purpose

Charting the earnings numbers reported by Korean firms produces a bell curve, but for a sharp discontinuity in the area surrounding zero. The purpose of this paper is to investigate if and how a large segment of Korean managers might manage accounting numbers to produce the observed result.

Design/methodology/approach

This study adopts an empirical research method using Korean listed firms as a sample. The primary focus of investigation is on major income statement variables that might produce the observed results in earnings from operations and net income.

Findings

Managers of Korean firms opportunistically use almost all income statement variables to influence earnings numbers. They manage revenues and selling, general & administrative expenses to report small positive earnings from operations, but manage non-operating gains (losses) to report small positive net income.

Research limitations/implications

This paper does not answer several questions related to loss avoidance. First, the paper did not examine which actions, such as discretionary accruals, opportunistic business decisions, or bogus transactions, were employed to affect line items on the income statement. Second, the paper did not investigate what specific incentives trigger Korean managers to report small positive earnings. Korean firms have traditionally raised capital by borrowing funds from creditors and governmental agencies. Thus, they may be concerned that reporting losses would reduce their borrowing capacity. Finally, corporate governance, such as CEO tenure and option grants may influence the extent of earnings management to avoid losses, but most corporate governance data for Korean companies must be manually collected. Accordingly, these subjects are left for future studies as well.

Originality/value

This study contributes to accounting literature by reporting how managers of Korean firms artificially coordinate major income statement variables and report small positive earnings figures, noting the differences between earnings management investigating methodology and ones used in previous studies.

Keywords

Acknowledgements

The authors thank two anonymous reviewers and participants at the 2015 Southwest Decision Sciences Institute annual meeting and the 2015 American Accounting Association annual meeting for useful discussions. This research was supported through the 2014 College of Business Summer Research Grant at Prairie View A&M University.

Citation

Lee, B.B., Shin, H., Vetter, W. and Kim, D.W. (2017), "Management of income statement variables to report small positive earnings numbers", Asian Review of Accounting, Vol. 25 No. 1, pp. 58-84. https://doi.org/10.1108/ARA-09-2015-0091

Publisher

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Emerald Publishing Limited

Copyright © 2017, Emerald Publishing Limited

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