Resumo

Earnings management occurs when managers use judgment in presenting accounts and in transactions to change financial reporting in order to mislead some stakeholders about the company's underlying economic performance or to even influence contractual outcomes that depend on reported accounting numbers (Healy & Wahlen, 1999). Ahmad-Zaluki et al. (2011) comment that during periods of economic stress most firms probably exhibit lower earnings, which could possibly encourage policy makers to engage in income-increasing earnings management to compensate for the decrease of operational performance.

The question we address is whether accounting information quality is associated with factors related to economic instability. More specifically, we investigate whether the accounting amounts of Latin American firms – analyzed in terms of earnings management – could be explained by the inflation (consumer price index) and stock market volatility conditions in which these companies operate.

The quality of accounting information is a concept that cannot be measured yet by a single variable, thus it has to be measured by several attributes, among them earnings management, which related to exercising earnings discretion in an opportunistic manner, is a matter of serious concern to shareholders, creditors, standard setters, and regulators in global capital markets. The uncertainty arising from unstable economic environments could encourage managers to act opportunistically in an attempt to maintain their "good results", even to the detriment of the other parties involved.

Our sample consists of an unbalanced panel formed of 609 companies listed in Latin American exchanges, in the period 2010-2016, totaling 2,368 firm-year observations. We consider earnings management as the dependent variable, measured using the amount of discretionary accruals, as proposed by the Modified Jones Model (Dechow, Sloan, & Sweeney, 1995); and economic instability as the independent variable, measured by annual inflation and the annual volatility in stock exchange trading in the respective countries. Several control variables were inserted into the econometric modeling.

We found evidence of positive and statistically significant relationships between the amount of discretionary accruals and economic instability (represented by both inflation and annual stock exchange volatility). The results are robust in considering different approaches to parameter estimation. The evidence persists in robustness tests considering alternative models for the operationalization of discretionary accruals. Further analysis also suggests that the discretionary accruals can be explained by economic-financial characteristics of companies, such as profitability, liabilities, etc.

We therefore present significant evidence that in periods of greater economic instability, managers seem to use accounting choices more strongly to manipulate results, possibly in order to achieve their goals, which may be more difficult in times of more aggressive economic crises. Thus, in a period of economic instability, financial statements may not present reliable information relevant to the decision-making of various users.

Ahmad-Zaluki, N. A., Campbell, K., Goodacre, A. (2011). Earnings management in Malaysian IPOs: The East Asian crisis, ownership control, and post-IPO performance. The International Journal of Accounting, 46(2), 111-137. Dechow, P. M., Sloan, R. G., & Sweeney, A. P. (1995). Detecting earnings management. The Accounting Review, 70(2), 193-225. Healy, P. M., & Wahlen, J. M. (1999). A review of the earnings management literature and its implications for standard setting. The Accounting Horizons, 13(4), 365-383.