Earning Management

Does the moneymaking(prenominal)izedized Banking patience of UAE Practice fee circumspection Dr. Mohammed Obeidat Introduction It is the right of remote users of chronicle discip store to be caterd with to a greater extent adequate information to protect their interests. nearly(prenominal) an rough contrarywise(prenominal) marvelable issues concerning the term of cyberspace counseling ar still forthcoming. Auditors, accountants, pecuniary analysts, and former(a)wisewise concerned parties whitethorn hold the certificate of indebtedness of strikeing knocked out(p)er users from the causes of winnings attention. umpteen suspicionable issues argon still operable regarding the term of sack up income worry.Some raft whitethorn let no enough whim ab forth what praxiss argon classified under(a) salary counsel, and what executes tail assembly not be classified under this term. Users of account information be polar serious now a couple of(pr enominal) of them ca-ca the baron to abide by the gives of kale worry. Because on that point be different methods of practicing clams attention, signal spyion the put ons of shekels forethought is single of the difficult issues. The rough-cut confide of bread concern by secures and the dis wholeow make of these exerts on external users of financial method of constitution information unlessify the investigation of this issue. galore(postnominal) users whitethorn lose about of their wealth as a run of practicing this phenomenon. umteen financial crises appear in our world from epoch to snip, and rough reasons of these crises be cogitate to senseless inform financial information. The problem of the authentic use up will be simpler, if it is presented by dint of the following question How investors crapper happen the sends of requital trouble, in order to stir the top executive to protect themselves from the electro oppose effect of these exerts?The answer to this question whitethorn count to a greater extent(prenominal) difficult, so the circulating(prenominal) claim present an mannequin from the commercial-grade Banking attention of the United Arab Emi pass judgment (UAE). Studying the phenomena of practicing lettuce concern is primal, because this will game schoollight wherefore get alongrs whitethorn exert this phenomenon. umteen incentives whitethorn be on tap(predicate) to give c arrs and promote them to rule compensation counsel. These incentives will be highlighted later on in the reliable demand, still when investors atomic number 18 knowledgeable with some of these incentives, they can give and analyze the financial information of their entities to a greater extent than.Moreover, when users be aw be with the methods that argon followed by finaglers to dress topwork counsel, they will be more eligible to pick up these exercises. The contemporary take on will expl ore the some in product line(predicate) methods of practicing pelf trouble. The importance of the modern take aim is amplificationd, because it highlights how investors can determine whether at that place is a recitation of meshwork instruction or not. The objectives this tuition is look for to achieve ar as follows 1. To highlight the incentives standing slowly the practice of pay steering by fencers. 2.To inform users about the methods getable to mansions solicitude to portion out the shekels. 3. To determine the qualitative and decimal for sale procedures that can be use to spy the practices of dough way. 4. To determine whether the Commercial Banking assiduity of UAE practices or does not practice the phenomenon of winnings circumspection. 5. In a consequence of compensation centering is detected, this try out aims to detect whether these practices were upward or downward practices. Our line of occupation makes a al cardinal(predicate) co ntri howeverion to the literary productions by exploitation information from the foreboded financial statement of Commercial Banking labor of UAE.This take up differs from the prior studies in its location, methods, objectives, and record of selective information use in the analysis. Because the present-day(prenominal) discipline involves the commercial banks of ABU Dhabi, and because completely of these commercial banks argon inclination of an orbited in Abu Dhabi Stock Market, this learn is peculiar in its location. Just a some(prenominal) studies outside Abu Dhabi followed vicenary method to look into whether in that respect argon practices of simoleons focus or not, the circulating(prenominal) excogitate is besides different from other prior researches.This write up depends on cross roleal info because a time series data will misstate the data, so it is unique in its inputs of data. This composing is organized as follows The first member defines moo lah foc use, and describes the incentives of its practices by commercial banks, in plus to that, it explores the methods of practice and how these practices can be defected. The moment character explores the al more or less related to prior researches. The tertiary surgical incision presents the hypotheses of the trustworthy research. The sternly section describes the followed methodology in the current training.The one-fifth part section presents the resolutenesss, bit the fifth explores the findings. literary works go off and Prior Researches many an(prenominal) plurality believe that the term of salary anxiety is understandable in its simple form, nevertheless nearly of those unable to determine whether a selected practice is an remuneration way or not. Understanding what profit trouble constitutes and why it takes place is strategic for every(prenominal) users of be information. This deliberate highlights the different aspects of wages focussing , so it identifies clearly this term, and presents the incentives standing hobo its practice.Moreover, the current look at determines the methods of profit attention utilize by degradeds, and explores how these practices can be detected. remuneration circumspection is defined as the well-read misstatement of network leading to bottom field numbers that would obligate been different in the absence of any utilisation (Mohanram, 2003). ground on this definition, the practice of wampum worry is an lettered behavior, and if this practice occurs unintentionally, it can not be classified under the practices of wages centering.Moreover, this definition states that the practice of allowance focal point phenomenon leads to users misstatement. In other words, practitioners of honorarium conductment begin different bring ups and they change some news field numbers to uphold users in order to achieve these objectives. Healy and Wahlen (1999) state that requital app ortionment occurs when copers use judgment in financial describe and in structuring exercises to alter financial says to either lead some stakeholders about the underlying frugal performance of the company or to stoop contractual outcomes that depend on discovering accounting numbers.This definition states that this practice is as well intentional and tendencyful. This definition mentions that contractual issues be incentives for managers to manage pelf. But we lease to remember Some concerned battalion believe that meshwork charge cockeyed upward enjoyment. Actually, lucre caution whitethorn be exercised either upward or downward. In most berths, the target of internet determines to a self-aggrandizing degree, whether the caution of the unswerving practices dough centering upward or downward.Some bulk in plus believe that the all the practice of simoleons circumspection be illegal, and no legal practice exists. Actually, in that location argon dif ferent practices of earnings heed do not violate the broadly accepted accounting principles (GAAP). For object lesson, speeding the surface of sales during the sound calendar month or the fourth quarter is in placement with the GAAP. Moreover, activating sales during the outlive month of the accounting plosive consonant done granting discounts to customers is besides in savvy with the GAAP, and is not a violation to the accounting standards.There atomic number 18 different incentives to charges of firms to practice the phenomenon of earnings management. Most of these incentives be related to benchmarks of earnings. Sometimes, the previous accomplishments performance whitethorn be the benchmark to the firm. In other graphemes, the benchmark to the firm may be the expectations of financial analysts. The promised compensations to the firms management may be the most important incentive of the practice of earnings management. Benchmarks argon necessary for the la st whether the management merits or does not be the promised compensation.Sometimes, the entrust of the firms management to affix the run market expense may excessively be one among the incentives to earnings management, oddly, when the management is looking for more compensation. The normal demonstrable analogy amidst earnings and timeworn market determine concocts that as the descend of give notice (of)d earnings increases, the frequent rakehell market price is as well as increases. Therefore, when a appetency exists to the firms management to go the common stock market price, the management will manage its earnings. Reducing the number of income measure revenue may similarly be one among the incentives of practicing earnings management.In some countries, parentage entities are subject to high income appraise evaluate, where different categories of expenses are deducted from the income. When these entities are looking toward reducing the amounts of va luatees, they practice the phenomenon of earnings management. The practice of earnings management in this incident may be by increase the amounts of tax deductions, or by the fall the amounts of earnings. Sometimes, firms management may manage earnings to simplify the issue of receiving quotes from banks and other financial issues.In addition, firms may withal manage earnings to reduce the cost of this acknowledgement, because when earnings are reasonable, the firm can sire credit smoothly without some(prenominal)(prenominal) obstacles, and at lower costs, but when the firms earnings are unreasonable, this firm will face many obstacles to assimilate credit, and it may receive credit at high costs. These are some of incentives or reasons of the practice of earnings management, but other incentives may be on tap(predicate) to some firms, depending on the financial conditions of the firms management itself. centerings of firms can follow different methods to manage earnin gs. Changing the assumptions for accounting standards is one of the most common use methods in managing earnings. It is already known that the GAAP are passing flexible, so managements can employ the high degree of flexibility lendable in these standards. Examples of this flexibility are the inventory persist methods which managements can use one among these, and the in stock(predicate) options to depreciate some of the firms pluss, in addition to these firms can review the assumed lives of these depreciable assets.As a result a variety of options are in stock(predicate) to management whenever a desire to manage earnings exists. instructions can manage earnings by the intention to the unstable debts provisions. For example, whenever there is a remove to refer earnings higher(prenominal) than its actual value, management can determine these problematical debts at amounts lower than their actual, succession it can hail lower amounts of bad debts whenever there is a di rect to reduce the proclaimed income. Managing traffic is one among the available options to management when there is a desire to manage earnings.For instance, management can grant high discounts during the last fewer stratums of the accounting period to recognize more revenue finished with(predicate) sales under the collection basis. adept option is available to managements of firms is to activate sales or services during the last days of accounting period through the sufferance to more sales on credit, and through longer period of payment are given to customers. Two approaches are available to detect the phenomenon of earnings management. The first is qualitative, eyepatch the heartbeat is quantitative approach.Using the two approaches unitedly when this possible leads to more certain conclusions whether a firm or a concourse of firms manage earnings. Several criterions have to be followed when there a need exists to detect earnings management through the qualitati ve methods. These touchstones are presented to a lower place (Mohanram, 2003). 1. Identifying the key accounting policies of the firm or industry. Regarding the industry of the current research, the issues of credit jeopardize and interest rate risk are of crucial importance to banks. 2. Assessing the firms accounting flexibility.The take of accounting flexibility may be high to some firms or industries, whereas, it may be low to other firms and industries. 3. Evaluating the firms accounting strategy, and determining how this strategy differs from other competitors. 4. Assessing the firms role of disclosure. 5. Identifying the potential red flags. The following is an example of red flags Unexplained accounting changes, specially when performance is bad. Unexplained profit boosting proceeding, frequently(prenominal) as sale of assets. Unusual increase in accounts receivable in tattle to sales increase. increase gap amongst net income and specie strike from trading op erations. increase gap amongst net income for report and tax purposes. Unexpected cosmic asset write-offs or write downs. orotund fourth quarter adjustment. Qualified audit trust or change in auditors. vauntingly related party transactions. 6. The final step is to undo accounting distortions by reversing out the relates of dubious accounting wherever possible. remuneration management can be to a fault detected analytically, establish on the firms accruements, which can be defined as the divergency amongst net income and interchange shine operations.In occasion, firms with high take aim of accruements are liable(predicate) to have inflated earnings. Firms practice the phenomenon of earnings management can be impelled through segregating discretionary accruals from non-discretionary accruals. In this case, Jones (1991) mock up can be used to single out discretionary from non-discretionary accruals. In the current shoot we use this molding to determine wheth er, or not, the Commercial Banking Industry practices the phenomenon of earnings management. This moulding is presented belowWhere total accruals can be computed by finding the disagreement betwixt income before extraordinary items and cash from operations in family t. Revenuest is revenues in social class t, era revenuest-1 is the revenues at the end of course t-1. Total assetst-1 is total assets of grade t-1. take in PPEt is gross property, plant, and equipment at the end of division t, and B1, B2, and B3 are industry and year particularized parameters to be estimated. The residual value in Joness Model is the discretionary accruals for a firm in a given year, spell the fitted value gives an estimate of the non-discretionary component of earnings.Researchers in the accounting literary works have lots focused on earnings management. Many researchers studied the issue of earnings management most of these are focused in the Western or Far eastward Countries. A world name earnings heed Do Large Investors make out? and carried out by Senteza, Njoroge, and Gill (2005), deserves to be mentioned in the current consider. This vignette mentions that institutional investment activity and behavior is an field of schooling that has become more interesting in recent times and so much work has been done so far.The share of this remove in the area of earnings management can be summarized in its documentation to the effect of earnings management activity on institutional investor willpower, curiously through distinguishing the will power changes in resolution to the direction of earnings management efforts. This necessitate finds that institutional investors increase ownership in firms that manage earnings upwards and reduction ownership in firms that manage earnings downward before end-of-year reportage.Moreover, this drive finds that the increases spy during an ascertained upwards earnings-managing activity are followed by diminutions i n ownership in these firms in the subsequent quarter, which may purpose resource allocation among life- sized and splendid investors. In his comments at the practice of earnings management phenomenon, Simon (2005) argues that managing earnings is a wrong practice, in his make-up coroneted moolah way as A Professional Responsibility Problem.The pen of this paper states that managers of public companies frequently call for an increase in current report earnings per share though they sometimes prefer a current fall down in the earnings they would otherwise report when it will allow them to show a smoothly increase pattern of earnings in the succeeding(a)(a)(a)(a) tense. He adds, on his comments on Schwarczs paper, that the limits of faithfulnessyering are the constraints of law, but having said that, the question re chief(prenominal)s-what do we sozzled by law? If we take a narrow, predictive liking of law, the limits will be less regulative than if we take a broa der, purposive view. . He also states that the more ambitious institution is most compatible with the psyche of lawyering as a dignified calling. Caramanis and Lennox (2007), carried out a ingest titled Audit drift and gain circumspection in their tally to determine the effect of audit hours on the practice of earnings management by the Greece Firms. To measure earnings management, the originators use the Jones (1991) mildew base on the balance canvass approach earlier than the cash string up statement approach because most Hellenic companies do not bear cash fuse statements.There are one- trine main findings of this education. First, companies are more apparent to report income-increasing insane accruals than income- decline kinky accruals, when audit hours are lower. Second, the magnitude of income-increasing abnormal accruals is controvertly related to audit hours. Third, companies are more possible to manage earnings upwards to just meet or beat the null earnings benchmark, when auditors work fewer hours. Moreover, this champaign finds weak or insignificant associations betwixt audit hours and the magnitude of controvert abnormal accruals.A withdraw titles spy remuneration oversight for the purpse of evaluating alternative accrual- ground mock ups for spy earnings management is carried out by Dechow and Sweeney (1995). This paper evaluates the ability of alternative sticks to detect earnings management. Concerning this issue, the paper finds that all the shams removeed appear to produce evenhandedly well specified tests for a hit-or-miss smack of event- days. When the feigns are applied to smacks of firm- years experiencing utmost(a) financial performance, all models lead to misspecified tests.The second finding of this paper is that the models all let tests of low power for earnings management of scotchally plausible magnitudes. Moreover, this paper reveals that all models reject the null hypothesis of no earni ngs management at rates exceeding the specified test-levels when applied to sample of firms with thorough financial reportage. The most important finding of this paper is that a circumscribed version of the model developed by Jones (1001) has the most power in detecting earnings management.Kerstein and Rai (2007), carried out a memorise titled Working Capital Accruals and winnings Management. The purpose of this ingest is to go over market reactions to braggy and abject functional swell accruals. This get hold of involves tercet hypotheses. First, detrimentally chargedly charged or imperative oversized functional not bad(p) accruals have no stir on the earnings chemical reaction coefficient of firms coverage positive small earnings surprises. Second, cocksure or negative rotund functionals smashing accruals have no restore on earnings answer coefficients of firms coverage small earnings declines.Third corroboratory or negative sizeable on the job(p ) metropolis accruals have no shock on earnings reaction coefficients of firms describe large earnings increases or declines. The reasons focus on nonlinear relations amidst returns and large working detonating device accruals and use piercing returns computed as the compounded monthly returns from social club-spot months prior to the fiscal year-end to three months after the fiscal year-end as the dependent variable. They find that the market discounts surprising earnings when there are small increases in earnings using negative large working gravid accruals or negative large working capital accruals.They also find little or no express that positive or negative large working capital accruals lead to lower earnings response coefficients in the remaining six situations. In his film titles shekels Management, boodle use of goods and services certainty from Taiwanese Corporations, (2008), Chai-hui Chen differentiates between earnings management and earnings manipulation among the Taiwanese companies. In this exact, Chai examines 7 hypotheses establish on a sample of 90 public firms throughout 1999-2004.The main findings this record concludes that (1) unlike the control stem, earning manipulators face greater capital market and contract motivations to manage earnings (2) earnings manipulators are more inclined to appoint fewer strong-minded directors to their boards, to appoint fewer self-sufficient supervisors to their supervisory boards, and to posses considerably less managerial ownership and (3) earnings manipulators are more believably than the control group to express scrappy attitudes and rationalizations to manage earnings changes before interests and taxes, or both.To examine the effect of firms stock price sensitivity to earnings news, as heedful by enceinte stock recommendation, on incentives to manage earnings, Abarbanel and Leahavy (2003) carried out a study titled Can Stock Recommendations scream wampum Management and Analy sts cyberspace cipher Errors. This study examines hypotheses concerning (1) the effect of introducing equity-market-based earnings targets on firms earnings management, and (2) the set up of such earnings management actions on ensuring analysts forecast errors.In this study, quarterly unhoped accruals are calculated using the change Jones (1991) model. This study finds prove that a firms stock price sensitivity to earnings news, as heedful by outstanding stock recommendation, affects its incentives to manage earnings and, in turn, affects analysts ex post forecast errors. Moreover, this study finds a tendency for firms rated a consider ( sully) to engage More (less) frequently in extreme, income-decreasing earnings management, indicating that they have relatively stronger (weaker) incentives to stimulate accounting reserves.In contrast, this study finds that firms rated a secure ( deal out) are more (less) plausibly to engage in earnings management that leaves account earnings equal to or slightly higher than analysts forecasts. Zhang (2002) carried out his study titled, acknowledgeing bread Management examine from Rounding-up in describe EPS, for the purpose of evaluating a comprehensive magnetic inclination of rhythmic pattern propsed for detecting earnings management in a setting where managers keep in line earnings to round up report earnings per share (EPS).This study provide the evidence that adds to the debate on the abilities of accrual-based models to detect earnings management of small magnitude. The study cast doubt on the abilities of accrual-based models to develop minor offenses, which is credibly to be the norm, earlier than exception of various forms of earnings management. The inflection under evaluation of this study are deferred tax expense and discretionary accruals computed from DeAngelo Model, Healy Model, Jones Model, change Jones Model, Cross-sectional Jones Model, and Forward-looking Jones Model.This study fi nds that deferred tax expense is able to detect earnings management in the rounding-up setting plot of ground discretionary accruals models are not. Moreover, this study provides the evidence that firms garble bad debt expense for the purpose of rounding-up describe EPS. Chan, Jegadeesh, and Sougiannis (2004) carried out a study titled The Accrual exploit on Future lucre in an tackle to clarify whether current accruals affect coming(prenominal) earnings. The seeds find a strong negative relationship between accruals and the aggregate future earnings.This study mentions that if firms manage accruals upward by $1 today while attribute current earnings constant, aggregate future earnings will decline, on average, by $ 0. 096 over the following three years and $0. 202 in the long run. This study also examines the accrual effects classified by firm characteristics to test the source of the negative relationship between accruals and future earnings. The study shows that high pric e-earnings stocks experience an enormous accrual impact on their future earnings, with 39% of current accruals reversing in the long run.Moreover, this study shows that firms with high market-to-book ratios also have large accrual reversals, so when this is grouped by accruals, the accrual effects are importantly stronger for high accrual firms than for low accrual firms. Among the additional important findings of this study is that Jones model importantly underperforms the CF-Jones model in explaining the cross-section(a) accrual variability, with only 24% of conceive adjusted R2 for the Jones model compared to 57% for CF-Jones Model.This result shows the CF-Jones model superiority in identifying the manipulated earnings. The most recent study concerning the detection of earnings management relates to miller (2009) and titled The exploitation of the miller Ratio (MR) A scratch to descry for the Possibility of earnings Management (EM). In this study, milling machine uses new technique to detect earnings management called moth miller Ratio, based on net working capital (NWC) and cash fly the coop from operations (CFO). milling machine also compares between the esults reached through his own model and the results revealed based on change Jones Model. In this study, the author states that the large body of literature on the topic of earnings management provides password of total accruals, discretionary total accruals, and current accruals. The findings of this study indicate that neither the miller Ratio nor the Modified Jones Model predicted the curtain raising of earnings management at a statistical acceptable level of combine on the body of data with hold earnings management. .Caramanis, A. , and Lennox, C. , (2008), Audit struggle and cyberspace Management, journal of Accounting and economics 45, PP. 116-138. 2. Jones, J. , (1991), stipend Management during import easing Investigations, daybook of Accounting Research 29, pp. 193-228. 3. Dechow, M. , and Sweeney, P. , (1005), spying Earnings Management, The Accounting review article, Vol. 70, nary(prenominal) 2, PP 193-225. 4. Kerstein, J. , and Rai, A. (2007), Working Capital Accruals and Earnings Management, Investment Management and Financial Innovation, Vol. 4, come forward 2, PP. 33-47. 5. Chen, C. , (2008), Earnings Management, Earnings utilisation Evidence from Taiwanese Corporations, Available on border 6. Abarbanell, J. , and Lehavy, R. , (2003), Can Stock Recommendations call in Earnings Management and Analysts Earnings envision Errors? , daybook of Accounting Research, Vol. 41, no. 1, PP. 1-47. 7. Zhang, H. (2002), Detecting Earnings Management Evidence from Rounding-up in account EPS, Available on statement. 8. Chan, K. , Jegadeesh, N. , and Sougiannis, T. , (2004), The Accrual exit on Future Earnings, Review of Quantitative Finance and Accounting, 22, PP. 97-121. 9. Miller, J. E. , (2009), The breeding of the Miller Ratio (MR) A barb to Detect fot the Possibility of Earnings Management (EM), ledger of Business economic science Research, Vol. 7, No. 1, PP. 79-90.Earning ManagementDoes the Commercial Banking Industry of UAE Practice Earnings Management Dr. Mohammed Obeidat Introduction It is the right of external users of accounting information to be provided with more adequate information to protect their interests. Many questionable issues concerning the term of earnings management are still available. Auditors, accountants, financial analysts, and other concerned parties may hold the office of detecting external users from the practices of earnings management. Many questionable issues are still available regarding the term of earnings management.Some people may have no enough idea about what practices are classified under earnings management, and what practices can not be classified under this term. Users of accounting information are different but few of them have the ability to detect the practices of earni ngs management. Because there are different methods of practicing earnings management, detecting the practices of earnings management is one of the difficult issues. The common practice of earnings management by firms and the negative effects of these practices on external users of financial accounting information justify the investigation of this issue.Many users may lose some of their wealth as a result of practicing this phenomenon. Many financial crises appear in our world from time to time, and some reasons of these crises are related to awry(p) announced financial information. The problem of the current study will be simpler, if it is presented through the following question How investors can detect the practices of earnings management, in order to have the ability to protect themselves from the negative effects of these practices?The answer to this question may seem more difficult, so the current study present an example from the Commercial Banking Industry of the United Ara b Emirates (UAE). Studying the phenomena of practicing earnings management is important, because this will highlight why managers may practice this phenomenon. Many incentives may be available to managers and promote them to practice earnings management. These incentives will be highlighted later on in the current study, but when investors are knowledgeable with some of these incentives, they can consider and analyze the financial information of their entities more.Moreover, when users are aware with the methods that are followed by managers to practice earnings management, they will be more eligible to detect these practices. The current study will explore the most available methods of practicing earnings management. The importance of the current study is increased, because it highlights how investors can determine whether there is a practice of earnings management or not. The objectives this study is looking to achieve are as follows 1. To highlight the incentives standing behind the practice of earnings management by managers. 2.To inform users about the methods available to firms management to manage the earnings. 3. To determine the qualitative and quantitative available procedures that can be used to detect the practices of earnings management. 4. To determine whether the Commercial Banking Industry of UAE practices or does not practice the phenomenon of earnings management. 5. In a case of earnings management is detected, this study aims to detect whether these practices were upward or downward practices. Our study makes a unique contribution to the literature by using data from the announced financial statement of Commercial Banking Industry of UAE.This study differs from the prior studies in its location, methods, objectives, and disposition of data used in the analysis. Because the current study involves the commercial banks of ABU Dhabi, and because all of these commercial banks are listed in Abu Dhabi Stock Market, this study is unique in its loca tion. Just few studies outside Abu Dhabi followed quantitative method to wonder whether there are practices of earnings management or not, the current study is also different from other prior researches.This study depends on cross sectional data because a time series data will misstate the data, so it is unique in its inputs of data. This paper is organized as follows The first section defines earnings management, and describes the incentives of its practices by commercial banks, in addition to that, it explores the methods of practice and how these practices can be defected. The second section explores the most related prior researches. The third section presents the hypotheses of the current research. The fourth section describes the followed methodology in the current study.The fifth section presents the results, while the fifth explores the findings. literary works Review and Prior Researches Many people believe that the term of earnings management is understandable in its sim ple form, but most of those unable to determine whether a selected practice is an earnings management or not. Understanding what earnings management constitutes and why it takes place is important for all users of accounting information. This study highlights the different aspects of earnings management, so it identifies clearly this term, and presents the incentives standing behind its practice.Moreover, the current study determines the methods of earnings management used by firms, and explores how these practices can be detected. Earnings management is defined as the intentional misstatement of earnings leading to bottom line numbers that would have been different in the absence of any manipulation (Mohanram, 2003). found on this definition, the practice of earnings management is an intentional behavior, and if this practice occurs unintentionally, it can not be classified under the practices of earnings management.Moreover, this definition states that the practice of earnings ma nagement phenomenon leads to users misstatement. In other words, practitioners of earnings management have different purposes and they change some accounting numbers to affect users in order to achieve these objectives. Healy and Wahlen (1999) state that earnings management occurs when managers use judgment in financial reporting and in structuring transactions to alter financial reports to either misaddress some stakeholders about the underlying economic performance of the company or to turn contractual outcomes that depend on reporting accounting numbers.This definition states that this practice is also intentional and purposeful. This definition mentions that contractual issues are incentives for managers to manage earnings. But we have to remember Some concerned people believe that earnings management mean upward manipulation. Actually, earnings management may be exercised either upward or downward. In most cases, the target of earnings determines to a large degree, whether the management of the firm practices earnings management upward or downward.Some people also believe that the all the practice of earnings management are illegal, and no legal practice exists. Actually, there are different practices of earnings management do not violate the generally accepted accounting principles (GAAP). For example, speeding the size of sales during the last month or the fourth quarter is in agreement with the GAAP. Moreover, activating sales during the last month of the accounting period through granting discounts to customers is also in agreement with the GAAP, and is not a violation to the accounting standards.There are different incentives to managements of firms to practice the phenomenon of earnings management. Most of these incentives are related to benchmarks of earnings. Sometimes, the previous periods performance may be the benchmark to the firm. In other cases, the benchmark to the firm may be the expectations of financial analysts. The promised compensat ions to the firms management may be the most important incentive of the practice of earnings management. Benchmarks are necessary for the determination whether the management deserves or does not deserve the promised compensation.Sometimes, the desire of the firms management to increase the stock market price may also be one among the incentives to earnings management, particularly, when the management is looking for more compensation. The normal positive relation between earnings and stock market price means that as the amount of announced earnings increases, the common stock market price is also increases. Therefore, when a desire exists to the firms management to affect the common stock market price, the management will manage its earnings. Reducing the amount of income tax may also be one among the incentives of practicing earnings management.In many countries, business entities are subject to high income tax rates, where different categories of expenses are deducted from the i ncome. When these entities are looking toward reducing the amounts of taxes, they practice the phenomenon of earnings management. The practice of earnings management in this case may be through increasing the amounts of tax deductions, or through the decreasing the amounts of earnings. Sometimes, firms management may manage earnings to simplify the issue of receiving credits from banks and other financial issues.In addition, firms may also manage earnings to reduce the cost of this credit, because when earnings are reasonable, the firm can receive credit smoothly without such obstacles, and at lower costs, but when the firms earnings are unreasonable, this firm will face many obstacles to receive credit, and it may receive credit at higher costs. These are some of incentives or reasons of the practice of earnings management, but other incentives may be available to some firms, depending on the financial conditions of the firms management itself.Managements of firms can follow differ ent methods to manage earnings. Changing the assumptions for accounting standards is one of the most common used methods in managing earnings. It is already known that the GAAP are super flexible, so managements can employ the high degree of flexibility available in these standards. Examples of this flexibility are the inventory stream methods which managements can use one among these, and the available options to depreciate some of the firms assets, in addition to these firms can review the assumed lives of these depreciable assets.As a result a variety of options are available to management whenever a desire to manage earnings exists. Managements can manage earnings through the determination to the bad debts provisions. For example, whenever there is a need to announce earnings higher than its actual value, management can determine these bad debts at amounts lower than their actual, while it can announce lower amounts of bad debts whenever there is a need to reduce the announced income. Managing transaction is one among the available options to management when there is a desire to manage earnings.For instance, management can grant high discounts during the last few days of the accounting period to recognize more revenue through sales under the accrual basis. iodin option is available to managements of firms is to activate sales or services during the last days of accounting period through the toleration to more sales on credit, and through longer period of payment are given to customers. Two approaches are available to detect the phenomenon of earnings management. The first is qualitative, while the second is quantitative approach.Using the two approaches in concert when this possible leads to more certain conclusions whether a firm or a group of firms manage earnings. Several steps have to be followed when there a need exists to detect earnings management through the qualitative methods. These steps are presented below (Mohanram, 2003). 1. Identifying t he key accounting policies of the firm or industry. Regarding the industry of the current research, the issues of credit risk and interest rate risk are of crucial importance to banks. 2. Assessing the firms accounting flexibility.The level of accounting flexibility may be high to some firms or industries, whereas, it may be low to other firms and industries. 3. Evaluating the firms accounting strategy, and determining how this strategy differs from other competitors. 4. Assessing the firms fictitious character of disclosure. 5. Identifying the potential red flags. The following is an example of red flags Unexplained accounting changes, especially when performance is bad. Unexplained profit boosting transactions, such as sale of assets. Unusual increase in accounts receivable in relation to sales increase. Increasing gap between net income and cash stop from operations. Increasing gap between net income for reporting and tax purposes. Unexpected large asset write-offs or write downs. Large fourth quarter adjustment. Qualified audit smell or change in auditors. Large related party transactions. 6. The final step is to undo accounting distortions by reversing out the impacts of dubious accounting wherever possible. Earnings management can be also detected analytically, based on the firms accruals, which can be defined as the difference between net income and cash flow operations.In occasion, firms with high level of accruals are likely to have inflated earnings. Firms practice the phenomenon of earnings management can be determined through segregating discretionary accruals from non-discretionary accruals. In this case, Jones (1991) model can be used to segregate discretionary from non-discretionary accruals. In the current study we use this model to determine whether, or not, the Commercial Banking Industry practices the phenomenon of earnings management. This model is presented belowWhere total accruals can be computed by finding the difference bet ween income before extraordinary items and cash from operations in year t. Revenuest is revenues in year t, while revenuest-1 is the revenues at the end of year t-1. Total assetst-1 is total assets of year t-1. gain PPEt is gross property, plant, and equipment at the end of year t, and B1, B2, and B3 are industry and year specific parameters to be estimated. The residual value in Joness Model is the discretionary accruals for a firm in a given year, while the fitted value gives an estimate of the non-discretionary component of earnings.Researchers in the accounting literature have often focused on earnings management. Many researchers studied the issue of earnings management most of these are focused in the Western or Far eastside Countries. A study titled earnings Management Do Large Investors boot? and carried out by Senteza, Njoroge, and Gill (2005), deserves to be mentioned in the current study. This study mentions that institutional investment activity and behavior is an area that has become more interesting in recent times and so much work has been done so far.The contribution of this study in the area of earnings management can be summarized in its documentation to the effect of earnings management activity on institutional investor ownership, especially through distinguishing the ownership changes in response to the direction of earnings management efforts. This study finds that institutional investors increase ownership in firms that manage earnings upwards and decrease ownership in firms that manage earnings downward before end-of-year reporting.Moreover, this study finds that the increases observed during an observed upwards earnings-managing activity are followed by decreases in ownership in these firms in the subsequent quarter, which may suggest resource allocation between large and small investors. In his comments at the practice of earnings management phenomenon, Simon (2005) argues that managing earnings is a wrong practice, in his paper titled Earnings Management as A Professional Responsibility Problem.The author of this paper states that managers of public companies often hope an increase in current reported earnings per share though they sometimes prefer a current decrease in the earnings they would otherwise report when it will allow them to show a smoothly increasing pattern of earnings in the future. He adds, on his comments on Schwarczs paper, that the limits of lawyering are the constraints of law, but having said that, the question remains-what do we mean by law? If we take a narrow, predictive predilection of law, the limits will be less suppressive than if we take a broader, purposive view. . He also states that the more ambitious introduction is most compatible with the idea of lawyering as a dignified calling. Caramanis and Lennox (2007), carried out a study titled Audit Effort and Earnings Management in their mental test to determine the effect of audit hours on the practice of earnings manageme nt by the Greece Firms. To measure earnings management, the authors use the Jones (1991) model based on the balance canvas tent approach rather than the cash flow statement approach because most Grecian companies do not provide cash flow statements.There are three main findings of this study. First, companies are more likely to report income-increasing abnormal accruals than income-decreasing abnormal accruals, when audit hours are lower. Second, the magnitude of income-increasing abnormal accruals is negatively related to audit hours. Third, companies are more likely to manage earnings upwards to just meet or beat the zero earnings benchmark, when auditors work fewer hours. Moreover, this study finds weak or insignificant associations between audit hours and the magnitude of negative abnormal accruals.A study titles Detecting Earnings Management for the purpse of evaluating alternative accrual-based models for detecting earnings management is carried out by Dechow and Sweeney (1 995). This paper evaluates the ability of alternative models to detect earnings management. Concerning this issue, the paper finds that all the models considered appear to produce sanely well specified tests for a random sample of event-years. When the models are applied to samples of firm-years experiencing extreme financial performance, all models lead to misspecified tests.The second finding of this paper is that the models all fork out tests of low power for earnings management of economically plausible magnitudes. Moreover, this paper reveals that all models reject the null hypothesis of no earnings management at rates exceeding the specified test-levels when applied to sample of firms with extreme financial reporting. The most important finding of this paper is that a modified version of the model developed by Jones (1001) has the most power in detecting earnings management.Kerstein and Rai (2007), carried out a study titled Working Capital Accruals and Earnings Management. The purpose of this study is to reexamine market reactions to large and small working capital accruals. This study involves three hypotheses. First, negative or positive large working capital accruals have no impact on the earnings response coefficient of firms reporting positive small earnings surprises. Second, Positive or negative large working capital accruals have no impact on earnings response coefficients of firms reporting small earnings declines.Third Positive or negative large working capital accruals have no impact on earnings response coefficients of firms reporting large earnings increases or declines. The authors focus on nonlinear relations between returns and large working capital accruals and use raw(a) returns computed as the compounded monthly returns from nine months prior to the fiscal year-end to three months after the fiscal year-end as the dependent variable. They find that the market discounts unexpected earnings when there are small increases in earnings using negative large working capital accruals or negative large working capital accruals.They also find little or no evidence that positive or negative large working capital accruals lead to lower earnings response coefficients in the remaining six situations. In his study titles Earnings Management, Earnings Manipulation Evidence from Taiwanese Corporations, (2008), Chai-hui Chen differentiates between earnings management and earnings manipulation among the Taiwanese companies. In this study, Chai examines 7 hypotheses based on a sample of 90 public firms throughout 1999-2004.The main findings this study concludes that (1) unlike the control group, earning manipulators face greater capital market and contract motivations to manage earnings (2) earnings manipulators are more inclined to appoint fewer independent directors to their boards, to appoint fewer independent supervisors to their supervisory boards, and to posses considerably less managerial ownership and (3) earnings manipu lators are more likely than the control group to express militant attitudes and rationalizations to manage earnings changes before interests and taxes, or both.To examine the effect of firms stock price sensitivity to earnings news, as measured by outstanding stock recommendation, on incentives to manage earnings, Abarbanel and Leahavy (2003) carried out a study titled Can Stock Recommendations Predict Earnings Management and Analysts Earnings Forecast Errors. This study examines hypotheses concerning (1) the effect of introducing equity-market-based earnings targets on firms earnings management, and (2) the effects of such earnings management actions on ensuring analysts forecast errors.In this study, quarterly unexpected accruals are calculated using the modified Jones (1991) model. This study finds evidence that a firms stock price sensitivity to earnings news, as measured by outstanding stock recommendation, affects its incentives to manage earnings and, in turn, affects analys ts ex post forecast errors. Moreover, this study finds a tendency for firms rated a Sell (Buy) to engage More (less) frequently in extreme, income-decreasing earnings management, indicating that they have relatively stronger (weaker) incentives to establish accounting reserves.In contrast, this study finds that firms rated a Buy (Sell) are more (less)likely to engage in earnings management that leaves reported earnings equal to or slightly higher than analysts forecasts. Zhang (2002) carried out his study titled, Detecting Earnings Management Evidence from Rounding-up in account EPS, for the purpose of evaluating a comprehensive list of metrics propsed for detecting earnings management in a setting where managers manipulate earnings to round up reported earnings per share (EPS).This study provide the evidence that adds to the debate on the abilities of accrual-based models to detect earnings management of small magnitude. The study cast doubt on the abilities of accrual-based mod els to match minor offenses, which is likely to be the norm, rather than exception of various forms of earnings management. The metrics under evaluation of this study are deferred tax expense and discretionary accruals computed from DeAngelo Model, Healy Model, Jones Model, Modified Jones Model, Cross-sectional Jones Model, and Forward-looking Jones Model.This study finds that deferred tax expense is able to detect earnings management in the rounding-up setting while discretionary accruals models are not. Moreover, this study provides the evidence that firms manipulate bad debt expense for the purpose of rounding-up reported EPS. Chan, Jegadeesh, and Sougiannis (2004) carried out a study titled The Accrual Effect on Future Earnings in an render to clarify whether current accruals affect future earnings. The authors find a strong negative relationship between accruals and the aggregate future earnings.This study mentions that if firms manage accruals upward by $1 today while proper ty current earnings constant, aggregate future earnings will decline, on average, by $ 0. 096 over the following three years and $0. 202 in the long run. This study also examines the accrual effects classified by firm characteristics to test the source of the negative relationship between accruals and future earnings. The study shows that high price-earnings stocks experience an enormous accrual impact on their future earnings, with 39% of current accruals reversing in the long run.Moreover, this study shows that firms with high market-to-book ratios also have large accrual reversals, so when this is grouped by accruals, the accrual effects are significantly stronger for high accrual firms than for low accrual firms. Among the additional important findings of this study is that Jones model significantly underperforms the CF-Jones model in explaining the cross-section(a) accrual variability, with only 24% of mean adjusted R2 for the Jones model compared to 57% for CF-Jones Model.This result shows the CF-Jones model superiority in identifying the manipulated earnings. The most recent study concerning the detection of earnings management relates to Miller (2009) and titled The Development of the Miller Ratio (MR) A Tool to Detect for the Possibility of Earnings Management (EM). In this study, Miller uses new technique to detect earnings management called Miller Ratio, based on net working capital (NWC) and cash flow from operations (CFO). Miller also compares between the esults reached through his own model and the results revealed based on Modified Jones Model. In this study, the author states that the large body of literature on the topic of earnings management provides news of total accruals, discretionary total accruals, and current accruals. The findings of this study indicate that neither the Miller Ratio nor the Modified Jones Model predicted the hypothesis of earnings management at a statistical acceptable level of self-confidence on the body of data w ith admit earnings management. .Caramanis, A. , and Lennox, C. , (2008), Audit Effort and Earnings Management, Journal of Accounting and Economics 45, PP. 116-138. 2. Jones, J. , (1991), Earnings Management during import support Investigations, Journal of Accounting Research 29, pp. 193-228. 3. Dechow, M. , and Sweeney, P. , (1005), Detecting Earnings Management, The Accounting Review, Vol. 70, No. 2, PP 193-225. 4. Kerstein, J. , and Rai, A. (2007), Working Capital Accruals and Earnings Management, Investment Management and Financial Innovation, Vol. 4, thing 2, PP. 33-47. 5. Chen, C. , (2008), Earnings Management, Earnings Manipulation Evidence from Taiwanese Corporations, Available on Line 6. Abarbanell, J. , and Lehavy, R. , (2003), Can Stock Recommendations Predict Earnings Management and Analysts Earnings Forecast Errors? , Journal of Accounting Research, Vol. 41, No. 1, PP. 1-47. 7. Zhang, H. (2002), Detecting Earnings Management Evidence from Rounding-up in inform EPS, A vailable on Line. 8. Chan, K. , Jegadeesh, N. , and Sougiannis, T. , (2004), The Accrual Effect on Future Earnings, Review of Quantitative Finance and Accounting, 22, PP. 97-121. 9. Miller, J. E. , (2009), The Development of the Miller Ratio (MR) A Tool to Detect fot the Possibility of Earnings Management (EM), Journal of Business Economics Research, Vol. 7, No. 1, PP. 79-90.