Manipulation of results in impairment losses on accounts receivable: a study of companies with quoted prices in Portugal

Abstract

The financial information plays an important role in the decision making by the managers and stakeholders of any company. Thus, to ensure the quality of financial statements should be an important goal of an organization. However, there are numerous incentives that lead to the earnings management, which leads to the distortion of accounting information. One of the means of earnings management, through a specific accrual, is in the recognition of impairment losses on accounts receivable.

The objective of this study is to analyze if exist earnings management in the recognition of impairment losses on accounts receivable by listed companies in Portugal, between 2010 and 2017, as well as identify the determinants of recognition of those losses.

The methodology used is based on a quantitative analysis, constructing regression models to analyze, on the one hand, the determinants in the recognition of impairment losses in accounts receivable and, on the other hand, the existence of practices of earnings management. Data collection was done through the SABI database, complemented by the content analysis of the reports available at the CMVM.

We conclude that the turnover, changes in accounts receivable, indebtedness, size and type of auditor are determinants of the recognition of impairment losses on accounts receivable. We also conclude that listed companies seem to manipulate results through impairment losses on accounts receivable, more specifically through income smoothing, especially in the post-crisis period, and via big bath during the period of crisis.

Our study contributes to the evidence that IAS/IFRS, despite being recognized as high quality standards, are permissible to earnings management, given the discretion and flexibility associated with them.