The effect of corporate governance and earnings management on earnings quality

Dissertation to receive Master's degree (M.A)

Field and direction: Accounting

Abstract:

The subject of this thesis is "the effect of profit management on the relationship between corporate governance and profit quality". In this research, the relationship between profit management and profit quality, corporate governance and profit quality, profit management and corporate governance and profit quality with the presence of control variables has been investigated. The research area includes the companies accepted in the Tehran Stock Exchange. The time domain also covers the period between 2016 and 2018. The purpose of the research is to examine the effect and relationship of profit management with the quality of declared profit in companies, and to examine the effect and relationship of the components of corporate governance with the quality of profit of companies, and to simultaneously examine the relationship between profit management and corporate governance with the quality of profit. The research includes two independent variables (profit management and corporate governance), dependent variable (profit quality) and control variables. The first main hypothesis examines the relationship between profit management and profit quality, the second hypothesis examines the relationship between corporate governance and profit quality, and the third hypothesis examines the relationship between profit management and corporate governance and profit quality. Information has been collected in two ways: library and field. Considering that the research is objective-based, practical and descriptive, the hypotheses were tested through linear regression. The result of the test showed that the first, second and third hypotheses were confirmed and there is a significant relationship between the variables.

Key words: Profit management, corporate governance, profit quality

Introduction:

The available evidence suggests that corporate governance has become one of the most common terms in the vocabulary of global business at the beginning of the new millennium. The collapse of large companies such as Enron and WorldCom[1] in the United States in recent years has drawn everyone's attention to the prominent role of corporate governance and serious attention to the aforementioned principles of preventing such collapses, and professional associations and universities throughout the world have shown a wide interest in this issue. The way of managing companies existed until the 1990s, however, the issue of corporate governance in its current form was raised in the 1990s in England, America and Canada in response to the problems related to the effectiveness of the board of directors of large companies. The foundations and concepts of corporate governance were formed by preparing the Cadbury report [2] in England, the regulations of the board of directors in the American General Motors Company and the D report [3] in Canada. Later, with the expansion of international investments, various institutions such as the World Bank, the Organization for Economic Cooperation and Development [4] and others have become active in this field and have published numerous and diverse principles. One of the latest principles published at the global level is the principles of the Organization for Economic Cooperation and Development in 2004, which includes the following six areas:

providing a basis for an effective corporate governance framework

shareholder rights and main ownership functions

equal treatment with shareholders

the role of stakeholders in corporate governance

disclosure and transparency

responsibilities of the board of directors , including internal controls, internal audit, etc.

The existence of good corporate governance reduces the vulnerability of developing markets, including the Iranian market, to financial crises and above all targets the healthy life of an economic enterprise in the long term, and for this reason, it aims to protect the interests of shareholders against the management of organizations. Therefore, the researcher proposed the relationship between some mechanisms of corporate governance and profit management on the quality of profit as a hypothesis, and in this research it is In this chapter, we will explain the generalities of the research, including the topic, statement of the problem, the necessity and importance of the topic, goals, hypotheses, variables, and the analytical model of the research. 2-1. Statement of the problem and how to choose the research topic

One of the most important features of joint stock companies is the separation of ownership from management, and financial reports are important sources of information for economic decisions that managers, investors, creditors and other users use to meet their needs. Since information is not available to users in the same way, information asymmetry is created between managers and investors. This asymmetry allows managers to have exclusive access to a part of information.Also, incentives such as bonuses, profit smoothing and evasion regulations make it possible for managers to engage in profit management for their own interests (Nasiri, 1389).

Due to the importance of the effect of financial figures on performance evaluation, the issue of manipulation and management of profit figures is at the forefront of public attention, and legislative authorities have also paid a lot of attention to this issue and have created several legal changes.

The concept of profit management from various aspects have been reviewed and researched and various definitions have been presented in this regard, the most important of which are: Scott (2003) has defined profit management as the conscious actions taken by the management regarding how to report profits to achieve specific goals in a way that is consistent with accounting principles. Generally, profit management is defined as the conscious actions taken by the management to achieve specific goals within the framework of accounting procedures. Management has access to information that is not accessible to other people. If managers intend to use profit management to convey information that represents the facts and the true value of the business unit, there is no problem with it, but concern arises when the managers' purpose of profit management is to mislead users of information related to the company's performance.

Today, there is no doubt about the importance of corporate governance for the success of companies, because this issue is related to the events of recent years and the financial crises of companies. It has become more important than before. Investigating the causes and pathology of the collapse of some large companies that caused huge losses, especially for shareholders, was caused by the weakness of their corporate governance systems. Research shows that corporate governance can improve the commercial standards of companies, encourage, provide and equip capital and investors and improve their executive affairs and is one of the main elements in improving the economic efficiency of companies because it oversees the relations of shareholders, board of directors, managers and other stakeholders (Ali Kohandal, 2019). has defined: "Corporate governance (governance of the business unit) is a number of responsibilities and methods used by the board of directors and responsible managers with the aim of determining the strategic path that guarantees the achievement of goals, control of risks and responsible consumption of resources". (See Wallenizer, 1995; Klein, 1998). And increasing the interests of shareholders and investors of the company is formed as a control mechanism with the aim of reducing information asymmetry between shareholders and other stakeholders. On the other hand, with the creation of the audit committee, the accuracy and quality of financial and accounting information is improved and with the preparation and approval of transparent financial information, the responsibility and accountability of the company's management for adequate and appropriate disclosure and improving the quality of financial reporting is more under control. 1981).

(Dovani, 2014) considers corporate governance to be a set of relationships between shareholders, managers and auditors of the company, which implies the establishment of a control system in order to respect the rights of the shareholders and properly implement the resolutions of the assembly and prevent possible abuses. This law, which is based on a strong accountability and social responsibility system, is a set of duties and responsibilities that must be carried out by the company's elements in order to ensure accountability and transparency. One of the most important players in the corporate governance system is the shareholders because they are the capital providers of the companies and maintaining their trust is of great importance. By electing the members of the board of directors, the shareholders indirectly play a role in the company's decisions, and institutional and major shareholders, considering that they are able to elect one or more members of the board of directors, can be effective in reducing agency costs. In a good corporate governance system, managers are accountable to the board of directors, and the board of directors is accountable to the shareholders and other stakeholders. Institutional ownership is the percentage of shares held by pension funds, banks, insurance companies, social security organizations, investment companies, and foundations and institutions of the Islamic Revolution.