The effect of increasing profit management and decreasing profit management on profit quality

Dissertation for Master's degree (M.A)

Accounting field

Dissertation abstract (including summary, objectives, implementation methods and results obtained):

It is expected that the net profit will show the result of the performance of an economic unit for a financial period. However, due to different motivations, management will manage profit (increasing or decreasing) and there is a possibility that this action will reduce the quality of profit. be made A decrease in the quality of earnings means that the reported net profit is different from the operating result of the business unit. The purpose of this research is to investigate the quality of profits of companies that are faced with increasing profit management or decreasing profit management. The statistical population of this research is the companies admitted to the Tehran Stock Exchange during the years 1385 to 1390, and 115 companies were selected as a statistical sample by the method of systematic elimination. In order to test the hypotheses, the values ??of four characteristics of profit and optional accruals (as representatives of profit management) have been measured and used in the estimation of multivariable regression models, using the panel data method. The results show that increasing profit management reduces the quality of the company's profit in the two levels of accrual quality and predictability, and reducing profit management increases the quality of the company's profit in the two mentioned levels. Also, no significant effect was observed between profit management (increasing and decreasing) and profit quality in the two levels of stability and smoothness of profit.

The primary goal of financial reports is to solve the problem of information asymmetry. To put it better, the purpose of financial reporting is to provide information that helps investors, creditors and other users in making economic decisions. Iran's accounting standards compilation committee states that financial statements are the main means of reporting financial information to people outside the profit-making unit, and the financial information provided by the accounting system can only be useful and used in the economic decision-making process of users when it meets minimum standards. These command standards are expressed under the title "qualitative features" of accounting information and can increase the usefulness of information.

On the other hand, in economic affairs, users always need accurate and reliable information to make decisions and perform their analysis, and naturally, the lack of appropriate and relevant information causes disruptions in their decision making. Financial figures and reports are an important part of the data and information required for this process. The product of the profit and loss statement is net profit and is one of the most important financial information used by investors and other users of financial statements. However, it should be noted that profit as the most important source of information may not reflect the actual performance of companies and their management, because due to the inherent flexibility of accounting standards, the interpretation and application of accounting methods is subject to the judgment and application of managers' opinions in many cases, but management goals are not aligned with shareholders (agency theory), so it is possible to manipulate and "manage" There is profit. This is done by bringing the reported profit closer to the target profit. For this reason, in addition to the quantity of profit, attention should also be paid to its quality.

1-2 Statement of the research problem:

Before the industrial revolution, the traditional theory of "owner, manager" prevailed. In other words, the owner was in charge of managing the company. But after the emergence of the industrial revolution and the growing of companies, as well as the specialization of work, including management, the issue of separating ownership from management and agency theory took place. In fact, the separation of share ownership and management control over the company's operations can cause a conflict of interests.

In financial management texts, it is mentioned that the most important task of managers is to maximize the wealth of owners, which is done through increasing net profit, increasing stock prices, and reducing risk. However, the model of maximizing the wealth of owners is challenged by the model of maximizing the wealth of managers. In other words, the managers try to maximize their interests, which are not necessarily the same as the interests of the owners.(Ahmadpour et al., 2013)

It should be noted that people in the society naturally seek to increase their personal interests, and managers are not exempt from this rule, and they are interested in presenting a favorable picture of the financial status of the business unit to shareholders and other stakeholders in order to maximize their personal interests, social well-being, and stabilize their job position. In financial reporting, in order to transfer information, to apply his personal judgment and recognition, the existence of this authority and as a result of the exercise of judgment by managers in the process of financial reporting has become known as "profit management". Many studies have been conducted in recent years about profit management. Regarding this issue, questions like this come to mind: Is earnings management inherently condemned or not?

Can earnings management be considered fraudulent in general, which misleads the users of financial statements?

Empirical evidence rejects this issue to consider earnings management in the financial reporting process as a form of fraud.

Guy et al. (1996) "Assumption have proposed "performance measurement" based on which managers try to accurately reflect the effect of current economic events in current reported profits using earnings management. On the other hand, they have defined the "assumption of opportunistic management of accruals" according to which managers reduce the accuracy and accuracy of profit reporting by applying profit management. (Bahar Moghadam et al. 2010)

Christy and Zimsman (1994) put forward "effective management measures" and define it in such a way that these measures increase the wealth of the parties to the contract, including shareholders, lenders and managers. On the other hand, they define "opportunistic management actions" as actions based on which, instead of increasing the wealth of all parties to the contract, managers only increase their own wealth. (same source)

Bahar Moghadam et al. and come to the conclusion that in Tehran Stock Exchange, profit management tends towards efficiency. Tagvi et al. (2009) study the relationship between agency costs and company value with profit management and come to the conclusion that profit management in companies listed in Tehran Stock Exchange is not for the benefit of the company and the managers of these companies use profit management for their personal benefits. 

Therefore, "profit management" in itself should not be considered a reprehensible matter, but according to the management's intention to manipulate the last figure of the profit and loss statement, profit management can be divided into two types of "opportunistic" and "profitable". It was overlooked that profit as the most important source of information may not reflect the actual performance of companies and their management, because as stated earlier due to the inherent flexibility of accounting standards, the interpretation and application of accounting methods in many cases is subject to the judgment and application of managers' opinions. For this reason, in addition to the quantity of profit, its quality should also be considered. 

In Iran, Etemidi et al (2013) investigated how earnings management affects earnings quality. They chose discretionary accruals as a representative of earnings management and studied its effect on four characteristics of earnings quality (quality of accruals, stability, predictability, smoothness) and finally came to the conclusion that earnings management reduces earnings quality. We separate increasing and decreasing and then we study the impact of each on the quality of profit. 1-3 The importance of the research topic and the motivation for choosing it: One of the main goals of establishing accounting standards is to give considerable assurance to the users of financial statements so that they can make relatively relevant and correct decisions based on published information.