Is corporate governance effective in earnings management in Asian emerging markets?
Authors: Chun-Hung Huang, Fengyi Lin, Sheng-Fu Wu, Jen-Bor Huang
Journal: Chiao Da Management Review. Dec. 2014, 34(2): 87-111.
Keywords: Earnings management; Corporate governance; Benford’s law; Reference point
Abstract:
In forensic accounting, Benford’s Law can be used to identify anomalous numerical data. This paper discusses
how implementing corporate governance regulations affect earnings management of emerging markets in Asia.
Benford’s analysis was employed to evaluate 122,310 instances of positive earnings-79,285 in China and
43,025 in Taiwan-from 1990 to 2012. The empirical results showed that earnings manipulation occurred in
Asian emerging markets. Our analyses revealed that the managers of publicly listed firms rounded up earnings
to achieve key reference points. Chinese corporate managers seemed to have had stronger incentives to
manipulate earnings than Taiwanese corporate managers. In addition, the extent of earnings management was
significantly reduced after corporate governance regulations were implemented. The results indicated that
implementing corporate governance regulations played a crucial role in reducing earnings manipulation
behavior. The findings of this study verify the effectiveness of corporate governance regulations in
detecting earnings management.