Assessing the perceptions of the quality of reported earnings in Egypt

Abstract

Purpose

The purpose of this paper is to assess respondents' perceptions of the quality of reported earnings in Egypt. To this end, three main issues are investigated: first, the potential incentives for engagement in earnings manipulation; second, the techniques most frequently used in manipulating earnings; and finally, the actions required to improve the quality of accounting information, including the reported earnings.

Design/methodology/approach

A total of 16 semi‐structured interviews are conducted in order to uncover any undisclosed issues and to supplement the results provided by a questionnaire survey distributed among three groups of respondents, namely, accounting academics, external auditors, and financial managers.

Findings

The results indicate that the main incentives for manipulating earnings in Egypt are to enhance the chances of obtaining a bank loan; to sustain last year's profit performance; to report profits and to avoid reporting losses; and to achieve high‐share valuation. The results also demonstrate that making inadequate provisions; capitalising rather than expensing expenditures; and overestimating the inventory value are the most frequently used techniques in earnings manipulation.

Practical implications

The results could be of assistance to Egyptian external auditors and regulators in their attempt to limit the incidence of earnings manipulation.

Originality/value

With a few exceptions, most of the literature on earnings management has been based on the US data. Therefore, research undertaken in a country such as Egypt, where the environment in many respects is different, may reveal a different perception of the quality of reported earnings and help determine how preparers in Egypt can further improve the quality of reported earnings.

Citation

Kamel, H. and Elbanna, S. (2010), "Assessing the perceptions of the quality of reported earnings in Egypt", Managerial Auditing Journal, Vol. 25 No. 1, pp. 32-52. https://doi.org/10.1108/02686901011007298