This paper aims to investigate whether non-listed domestic SMEs in Korea are motivated to engage in upward earnings management via accruals or real management activities to avoid loss reporting, decreased income reporting, and/or to facilitate borrowing loans from financial institutions in subsequent period. Empirical findings show that the SMEs, on average, tend to manage earnings using accrual as well as real-based devices such as abnormal cash flow from operations, abnormal production costs, and abnormal selling and administrative expenses with a view to achieving their intended goals. The results also indicate that depending on the conditions faced by individual SMEs, one earnings management tool might be preferred over the other.The results of this study corroborate the prevalence of earnings managements exercised by non-listed SMEs regardless of the tools employed, motivated by loss and income decrease avoidance as well as loan borrowings. It also provides clues to suspect the transparency of the SMEs accounting practices and to raise questions about the reliability of their financial reports. SMEs are generally subject to less stringent regulatory environment on the ground that the number of stakeholder groups are limited such that less importance is placed upon their financial information. Korean Accounting Standards Board recently promulgated the so-called “General Company Accounting Standards”, which is largely a modified version of current Korean GAAP, and expected to be applied to non-listed SMEs from 2011. Based upon the implications obtained from this study, however, it is essential for Korean accounting standards setting regime to develop future accounting standards for SMEs in such a way as to achieve a certain level of transparency even under non-listed SMEs context.
This paper aims to investigate whether non-listed domestic SMEs in Korea are motivated to engage in upward earnings management via accruals or real management activities to avoid loss reporting, decreased income reporting, and/or to facilitate borrowing loans from financial institutions in subsequent period. Empirical findings show that the SMEs, on average, tend to manage earnings using accrual as well as real-based devices such as abnormal cash flow from operations, abnormal production costs, and abnormal selling and administrative expenses with a view to achieving their intended goals. The results also indicate that depending on the conditions faced by individual SMEs, one earnings management tool might be preferred over the other.The results of this study corroborate the prevalence of earnings managements exercised by non-listed SMEs regardless of the tools employed, motivated by loss and income decrease avoidance as well as loan borrowings. It also provides clues to suspect the transparency of the SMEs accounting practices and to raise questions about the reliability of their financial reports. SMEs are generally subject to less stringent regulatory environment on the ground that the number of stakeholder groups are limited such that less importance is placed upon their financial information. Korean Accounting Standards Board recently promulgated the so-called “General Company Accounting Standards”, which is largely a modified version of current Korean GAAP, and expected to be applied to non-listed SMEs from 2011. Based upon the implications obtained from this study, however, it is essential for Korean accounting standards setting regime to develop future accounting standards for SMEs in such a way as to achieve a certain level of transparency even under non-listed SMEs context.
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