An examination of the factors influencing earnings management practices among companies listed in the Nairobi Securities Exchange

Abstract

This study aimed at examining the factors influencing earnings management among companies listed in the Nairobi Securities Exchange. The prevalence of Earnings Management (EM) in most organizations has been a matter of concern to many players in the accounting sector around the globe. In the Kenyan context, listed companies have been experiencing poor management practices attributed to EM. Whereas other studies assessed in this research did not focus on the extent to which earnings management is practiced in the Kenyan environment, this study bridges the knowledge gap and provides an in-depth review on the subject. The thesis adopted both explanatory and descriptive research designs. Both secondary and primary data were analyzed and presented using descriptive statistics , non- parametric analysis, univariate analysis and multivariate analysis. The thesis upholds that the extent to which EM was practiced fluctuated from 36.13% (in 2010) to 29.55% (in 2014), with the highest being in 2013 (47.32%). The main techniques used in perpetrating the practice were found to be manipulation of revenue amount, cash flow amount, and accounts receivable. Controlling the outcome of inventory valuation was also found to be a major technique. The main factors that influenced the extent to which EM was practiced included; free cash flow, size of debt in a company, management bonus and dividend paid. The study contributes to the knowledge on the extent to which EM is practiced in the listed firms and provides a basis for other scholars seeking to undertake research on earnings management. The study also gives pertinent recommendations to key stakeholders in the accounting profession on how to identify and mitigate instances of EM. External and internal auditors are advised to be more skeptical in analyzing financial statements and lay more emphasis on financial statement items that are prone to manipulation. Since the study used the Yoon's model to determine the presence of EM, the findings on extent of EM were limited to this model.