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The IUP Journal of Accounting Research and Audit Practices:

Impact of Earnings Management on Economic Value Added: A Study of Companies Listed on Dubai Financial Market †

Article Details

Pub. Date	: Oct, 2022
Product Name	: The IUP Journal of Accounting Research and Audit Practices
Product Type	: Article
Product Code	: IJARAP071022
Author Name	: Ibrahim R I Elmadhoun and Gaddam Naresh Reddy
Availability	: YES
Subject/Domain	: Finance
Download Format	: PDF Format
No. of Pages	: 18

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Abstract

The paper reviews the impact of earnings management through discretionary accrual on the Economic Value Added (EVA). The earnings management value was calculated for 52 companies listed on the Dubai Financial Market through Jones Model (1991), Modified Jones Model (1995), and the current model from 2014 to 2018. The results showed that companies practiced earnings management activities in varying proportions. In addition, EVA without adjustments and with additional adjustments for all sample companies were calculated. To test the validity of the hypothesis, regression analysis was used by applying the three empirical models. The results found that there is a positive effect of earnings management through discretionary accrual on EVA.

Introduction

Research on Economic Value Added (EVA) has a long tradition. Financial statements play a significant role in communication in accounting. As an illustration, the users can meet the needs of accounting information that reflects economic events during the activity period. Having said that, the informational content of the accounting profits disclosed in these statements is of great importance in the investment decision-making process by the users of the financial statements in the stock market. Although the financial statements are subject, when prepared, to a large number of accounting standards and policies, they are also subject to accounting disclosure standards. This is to say that it does not prevent corporate management from seeking to show financial statements, especially profits, in a way that serves their interests through earnings management practices. The earnings management initiative is the means used by the administration to increase or decrease the profits published in the financial statements in order to serve the goals of the administration. One of the methods in which managers practice earnings management is Discretionary Accruals (DAs). The accruals arise as a result of the management's choice between the available accounting treatments and options. It is worth mentioning that they keep an aim of inflating or reducing the profits of the institution. Hence, the researcher finds that most of the institutions' departments are working to increase or decrease the accounting receivables related to the accounts under collection, such as customer accounts and doubtful debts, inventory accounts, accounts payable and deferred revenues, and so forth in order to reach the target profit.