Investigating profit sharing policies in companies that have committed fraud in their financial reporting

Dissertation for Master's degree

Accounting field

Abstract

The purpose of this research is to re-explain the relationship between dividends and restatement of financial statements as a measure of profit quality. In particular, this research focuses on conditions that can classify the motivation of management in using accruals into two groups, fraudulent and non-fraudulent. In this way, only when the renewal of the presentation can indicate the low quality of the profit, which is caused by the opportunistic motives of the management. This issue is important because in other researches, the reasons and motivations of the management that led to the restatement of financial statements were not paid attention to, and all restatements were considered as a measure of the unfavorable quality of financial reporting.

Following the application of the prediction achievement model to classify restatements into fraudulent and non-fraudulent groups, the results of the research hypotheses test show that restatements are caused by motives Non-fraudulent management has a positive and significant relationship with the distribution of company profits. Also, this relationship is stronger for companies that have a higher level of profit distribution. In this way, the results show that the dividend contains information about the quality of the profit, especially the motivations leading to the restatement of the financial statements, and the dividend conveys the message that the profit reported by the company is of quality and the restatement of the financial statements is not due to the opportunistic motives of the management. Keywords: dividend, profit quality, restatement of the financial statements, restatement fraudulently; non-fraudulent restatement; Information content.

Introduction

One of the goals of investing is to receive profit. Therefore, investors are looking for a way to predict the dividend and the factors affecting it. Profits can help them make informed judgments and decisions. The profit figure included in the financial statements, in addition to showing the company's operational performance and future prospects, also provides a basis for comparison between companies. But when users can rely on the profit figure that is free of any manipulation, so that it can reflect the company's performance fairly and realistically (Aamili, 2018).

In this chapter, the research topic, research objectives and its necessity, research hypotheses and operational definitions of some of the words used in the research are explained. Also, a brief explanation of the sample, statistical population, how to collect and experience and analyze the data is provided. 

1-2 Description and presentation of the issue

One of the goals of investors is to achieve returns in the form of dividends. Therefore, investors are looking for a way to predict the dividend and the factors affecting it. Profits can help them make informed judgments and decisions. In addition to showing the company's operational performance and future prospects, the profit figure included in the financial statements also provides a basis for comparison between companies. But users can rely on the profit figure when the profit can reflect the company's performance fairly and realistically (Aamili, 2018). The possibility of using different accounting methods has caused the real (economic) profit of companies to be different from the profit reported in financial statements (Khushtaint and Esmaili, 2015). Managers' discretion in choosing among the allowed accounting methods is among other factors that affect the quality of profit. Therefore, the quality of the profit of the companies is affected by the reporting principles and discretion of the managers.

Net profit is considered as a factor for formulating the profit sharing policies (Tehrani and Zakari, 2018). Profit sharing by the company can indicate whether or not the reported profit is real and the fairness of the operational performance report by the business unit. In fact, managers decide to pay or increase dividends when they feel that their profits are not significantly affected by the correctness of the accounting method (i.e., the profits are real) and that a reduction in dividends in the future is unlikely. With this concept, dividends are not only a sign of future profitability, but also a sign of profit quality. Also, dividend is an effective method of management control.In order to protect themselves, it is expected that managers will be less tempted to justify profits (Alavi Tabari et al., 2018).

The relationship between profit sharing policies and the quality of financial reporting has been noted in several foreign and domestic researches (Barzdeh, 2012; Alavi Tabari et al., 2018; Farinha and Moreira, 2007). In some of these researches, renewal has been used as a measure of benefit quality. For example, in the research of Barzdeh (1392) and Alavi Tabari et al. (1388), the relationship between renewal and the company's profit sharing policy has been investigated. Contrary to expectations, the results of this research show that no significant relationship can be observed between the re-presentation and the company's dividend policy. However, there are many important theoretical and practical issues regarding re-presentation that have not been paid attention to in previous research. Simply put, all restatements cannot be considered as a sign of low quality financial reporting. For example, some renewals are beyond the authority of the company's management. Renewal of presentations that happened due to changes in accounting principles and standards are among these. Unexpected and unforeseeable events after the presentation of financial statements are also among other factors that are beyond the authority and power of the company's management and nevertheless lead to the re-presentation of financial statements. There are even some factors and incentives in the areas of management authority that lead to the re-presentation of financial statements, however, they are not a sign of poor quality of financial reporting. When the management intends to transfer its private information to the investors so that they can better understand the financial situation and future profitability of the company, it may act on financial reporting in a way that makes it inevitable to present the financial statements in future periods. In this way, such a restatement cannot be considered as a sign of low quality financial reporting or fraudulent financial reporting in the past (Badretcher et al., 2012).

The lack of attention to the reasons and motivations leading to restatement has caused previous researches to be unable to explain the relationship between restatement (profit quality) and the state of companies' profit distribution. In this research, by applying the forecasting achievement model, the motivations of management in financial reporting have been identified, and based on that, the restatements that result from management's authority have been classified into two groups, fraudulent and non-fraudulent. Based on theoretical foundations, it is expected that the renewal of presentations due to non-fraudulent motives not only do not show the poor quality of financial reporting, but also reflect the transfer of management's private information to investors, and as a result, such companies, while enjoying quality profits, share a significant part of it among investors. has a special The company's dividend status can indicate whether or not the reported profit is real and a fair presentation of the business unit's operating performance. Investigating the effect of the company's dividend status on profit quality criteria can provide investors with valuable information for predicting future profits, determining the company's value, and thus making investment decisions. Also, the management can use this information in making decisions in order to determine or change the profit sharing policy. In this research, the information content of dividend has been investigated in relation to the quality of reported profits.

The findings of this research will be an attractive and interesting topic for policy makers, investors and academics who claim that dividend is a sign of profit quality. The attention of these groups to the quality of profit is due to its effect on the level of information asymmetry between managers and investors and, as a result, its effect on the company's activities and value. For example, in the report of Richard Breeden [1] (2003), it is stated that the dividend is another method of measuring the truth of the reported profits. The ability to pay dividends depends on the availability of cash and the significant difference between the amount of reported earnings and the cash available for dividends, and ultimately a deficit indicates potential problems. He suggests that paying 25% of reported dividends as dividends as a logic or law in paying dividends can prevent companies from resorting to accounting to report inflated profits.