The Role of the Effectiveness of Accounting Information Systems in the Relationship between the Earnings Management and Financial Performance

Abstract

The effectiveness of the Accounting Information System (AIS) is expected to strengthen mechanisms leading to the efficient functioning of capital markets. AIS provides information that flows from the firm to stakeholders continuously. This flow of information forms the basis for the decision-making of the stakeholders. Therefore, the published periodical financial reports are expected to be relevant, faithfully represented, comparable, verifiable, timely, and comprehensible (Qatawneh, 2022). Additionally, international financial reporting standards provide management with a wide scope for choosing from different alternatives to treat the same transaction or event.

Management can misrepresent the timing, amount, or intent of transactions and events related to revenues or expenses without being involved in fraud or falsification of the records (Gul et al., 2013; Kwon et al., 2020). Moreover, management can take advantage of generally accepted accounting principles (GAAP) to select from various methods when computing earnings and other financial measures, which could lead to lower-quality financial information (Fields et al., 2018). This discretionary room allows management to report the desired profit, achieving its goals in the interest of other parties. As a result, phrases such as earnings management and manipulation have emerged. Management can manage earnings by classifying good (bad) news, smoothing income, practicing big bath accounting, and choosing from different accounting methods (Brad et al., 2020), which is known as accruals-based earnings management.

Keywords: Accounting, AIS, Earning Management, Financial Performance.

DOI: 10.7176/RJFA/13-24-07

Publication date: December 31^st 2022