The Effect of selected macroeconomic variables on earnings management: a case study of Co-operarive Bank of Kenya.

Abstract

There has been a rise in the cases of big companies losing their upward trajectory and eventually falling off the market space. Industry reports have shown that most of the big companies that were flourishing have now lost their pace and are unable to make profits let alone paying their debt as and when they fall due. This study is aimed at investigating whether the selected macroeconomic variables; interest rates, inflation and money supply have an effect on the choice by managers to manage the earnings of Co-operative Bank of Kenya. A recent study already concluded that banking institutions engage in earnings management therefore the main aim of this study is to investigate the possible effects that these selected macroeconomic variables have on earnings management in the bank. This study focused on a descriptive research design. The company the study is Co-operative Bank of Kenya that is one of the banks listed on the Nairobi Securities Exchange (NSE). This study used secondary data from the financial statements and financial reports and notes of Co-operative Bank to gather the required data. Regression modelling was used by using a regression equation to evaluate the strength of the independent variables through the multi-collinearity diagnostic test. The regression analysis of the total current accruals (constant) and the other independent variables indicated a weak relationship between the independent variables and earnings management. This concluded that there could be other factors that affect the decision of managers to manage the earnings in Co-operative Bank Limited other than the factors considered herein.