The Impact of Applying Financial Performance Indicators on Earnings Management in Manufacturing Companies

Abstract

The study aimed at finding out the impact of applying financial performance indicators on earnings management in manufacturing companies listed at Amman Stock Exchange. Five independent and dependent variables were stated: independent variables represented the earning per share (EPS), returns on equity (ROE), and the current Ratio (CR), whereas dependent variables standed for operating cash flows (OCF), and net profits (NP). The study adopted a descriptive and analytical approach by analyzing financial statements and reports of a sample of Jordanian manufacturing companies  using statistical tools to test the research hypotheses. Data of this research were gathered from a sample of 52 manufacturing companies based on a series period from 2007 – 2011, and processed using the statistical package of social sciences (SPSS).

The main results of the study are:

1- There is no impact of financial performance indicators (EPS and CR) on the process of earnings  management in the sample studied, despite of the ability of manufacturing companies to distort financial data as directed by, and for the interest of,  middle and top managements to accommodate certain conditions related to  internal and external factors, such as written changing financial instructions and levels of competition facing these companies.

2- There is an  impact of financial performance indicators (ROE) on the process of earnings management in manufacturing companies listed at Amman stock exchange. This is because of many accounting items that may by distorted by accountants to exploit the flexibility of international financial reporting standards (IFRS).

The study recommended the following:

1- there is a need to more studies on this topic using mathematical models, such as the modified Jones model of 1991 to measure the process of earnings management in manufacturing and nonmanufacturing companies.

2- it is benificial for the government to adopt a continuous revision of tax legislations and laws in order to prevent practices of earnings management.

3- the use of qualitative performance indicators, such as the level penetration of company's products and disconnection of board of directors' rewards with realized net profits.

Keywords: Financial Performance indicators, Earning Management, Jordanian Listed Manufacturing Companies.