This study explores earnings management practices in Australia and New Zealand before and after the regulatory changes and corporate governance reforms since 2003-2004.

In other words, it examines the effectiveness of regulatory reforms reflected in constraining earnings management in post-reform period as compared to pre-reform period.

Our results indicate some interesting phenomenon that the magnitude of earnings management did not decline after the governance reform. A positive time trend is observed in both Australian and New Zealand listed firms, suggesting that earnings management has been growing over time. Our test indicates a structural change has occurred in earnings management practice before and after the new regulations. A shift in behaviour is noticeable in post-reform periods as compared to pre-reform periods from downward earnings management (income decreasing) to upward earning management (income increasing).

Managers are more likely to show a smooth and growing earnings string to prove that firm performance has benefited from the reform and convince investors the better shaped and improved financial performance after the regulatory change. The shifting of earnings management behaviour from income decreasing to income increasing can be interpreted as the outcome of more ‘informative’, rather than ‘deliberate’, earnings management in a more transparent disclosure regime to capture short-run benefits of regulatory reforms, which is worth to further investigation.

The findings of the study can lead regulatory authorities taking appropriate measures to promote earnings quality in corporate financial reporting from a long-run decision usefulness context. Any future reforms on disclosure and corporate governance should be directed to protecting the interest of stakeholders as well as ensuring benefits outweighing costs for them. The behavioral change in earnings management could be useful for companies in reducing agency costs as anticipated in agency theory as well as restoring the confidence of investors in companies’ financial reporting practice.

Sun, L. & Farooque, O. A., (2017). An Exploratory Analysis of Earnings Management Practices in Australia and New Zealand, International Journal of Accounting and Information Management, (in print)