Academic journal article Journal of Finance, Accounting and Management

Proposing Conceptual Framework for Reducing Earning Management Using Ownership Structure Mechanism: Jordanian Companies Perspective

Academic journal article Journal of Finance, Accounting and Management

Proposing Conceptual Framework for Reducing Earning Management Using Ownership Structure Mechanism: Jordanian Companies Perspective

Article excerpt

Introduction

While FRQ is not observable directly, famous observers stated that they know it as they see it; they also energetically emphasize the importance of FRQ as the same as a modern capital market foundation. Former chairman of the United States Securities and Exchange Commission (SEC), Arthur Levitt said: "high quality accounting standards ...improve liquidity and reduce capital costs" and claims that "quality information is the life blood of strong, vibrant markets. Without it, liquidity dries up. Fair and efficient markets cease to exist." Easley and O'Hara (2004) stated that capital market decrease premium financial reporting to enable investors reduce investment risks, lending sustain of conceptual to Levitt's declare. Furthermore, the Senate of Canada (2003, p. 2) said: "analysts generally agree that the financial scandals appearing almost daily for months in the media were the result of some combination of at least three factors: failed corporate governance; lax auditing and accounting standards and oversight; and the incentives, at times perverse, provided by executive compensation systems".

There is a shortage in consensus as to what FRQ constitutes. For example, Blue Ribbon Commission (BRC) (1999) and Sarbanes-Oxley act (SOX) (2002) required auditors to discuss the FRQ methods and acceptability. Jonas and Blanchet (2000, p. 353) stated that: "in light of these new requirements, auditors, audit committee members, and management are now struggling to define FRQ". Rather than defining FRQ, prior literature review has focused on factors such as EM, financial restatements, and fraud that obviously curb the high FRQ achievement and have used the presence of these factors as proof of a breakdown in the process of financial reporting (Nichols & Wahlen, 2004; Barth et al., 2008). Thus far, the FRQ measurement has evaded the researchers and those interested to improve it.

The main significant function of corporate governance is to increase the integrity of the FRQ process (Cohen et al., 2004). Watts and Zimmerman (1978, p.113) stated that: "one function of financial reporting is to constrain management to act in the shareholders' interest". Investors needed additional accurate and comprehensive information for their decisions of investment due to rising the complication rising of today's business.

In the early 21st century, there were many corporate accounting scandals series in the United States of America (USA) and Europe. Examples included Enron, HealthSouth, Parmalat, Tyco, WorldCom and Xerox. The central issue of those scandals center was EM (Goncharov, 2005). EM has been concern of practitioners and controllers and has established substantial concentration in the literature of accounting (Loomis, 1999). EM has masked the accurate results of financial and businesses situation and has created ambiguous information that stakeholders be supposed to know (Loomis, 1999).

The crisis of global market (2008) has enthused enormous research body on both corporate control and FRQ. Usually finance and management are separated inside corporations. Though, the action of separation pretenses two conflicts. First, suppliers of fund facade communal action problems stopping them to monitor and discipline the company managers they are investors of (Macey, 1998). Second, managers need to persuade market applicants of the performance of firm, to be capable of apportion sufficient funds for the investments of firm. As the investments value is tied to the firm, this value relies on the future predictions of the business relationship between the firm and its suppliers. As a result, the stakeholders' perception about the firm's future forecast influences their inducement to take on such investments. Therefore, researchers recommended that in order to persuade stakeholders; managers may engage in EM (Graham et al., 2005).

The financial reporting scandals in USA and Europe corporations, which has previously been measured as the perfect model of financial reporting and regulation of capital market, has added to the defeat of investors' confidence in the direction of the accounting numbers truthfulness. …

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