EARNINGS MANAGEMENT PRACTICES IN COMMERCIAL BANKS LISTED AT THE COLOMBO STOCK EXCHANGE: EVIDENCE FROM SRI LANKA

Abstract

The purpose of this study is to examine whether commercial banks listed on Colombo stock exchange engage in Earnings Management (EM) practices. EM has become a major concern in the corporate world as plenty of avenues are available for managers to do so, despite the fact that accounting standards have stipulated with clear guidelines, rules and principles. Legitimacy theory provides a basis for corporate to appear as a legal person before stakeholders in order to carry out their operations smoothly. Therefore, shareholders, auditors, managers, accountants, and regulators are concerned whether financial statements have been manipulated. Previous studies find that managers engage in earnings management practices around the world by using different tools and techniques. Hence, this study attempts to investigate whether there are adequate factors that can be used by potential stakeholders to see whether banking companies listed on Colombo Stock Exchange engage in EM techniques. Several earnings management tests are carried out to test the extent to which managers engage in EM based on financial statements of ten banks for the years between 2010 to 2016. A conceptual framework comprising various motives and factors for managers to engage in EM practices developed based on literature review. Further, the study focuses on the awareness of managers, auditors and shareholders about EM practices. Study does not find strong evidence to conclude that commercial banks in Sri Lanka are engaging in EM practices. Major reason is found to be stringent compliance requirements to be complied by banks form local and international perspectives.