<abstract xmlns="http://www.w3.org/1999/xhtml">

<p>Managers are often employed many alternatives for earnings management following their objectives or the financial reporting objectives; the commonly used are the accrual-based and cash-based earnings management. The literature reveals that managers adopt the two strategies in different ways, suggesting a mixed relationship between them. Hence, this study investigates the relationship between the two strategies of earnings management in Algeria, whether it is a substitute or complementary. The study included 30 Algerian companies during 2011-2019, so a total of 270 firm-year observations were employed. Accrual-based earnings management was measured through the modified-Jones model, while cash-based earnings management was measured through the abnormal cash flows model. According to the results, Algerian companies engage more in accrual-based earnings management and employ the two strategies as substitutes, which explains the strong and negative effect of accrual-based on cash-based earnings management. We argue that companies engage first in accrual-based earnings management, and then they shift towards cash-based earnings management due to auditors’ scrutiny. Furthermore, we found a positive and a medium effect of return on equity on cash-based earnings management, which reflects the managers’ desire to adjust operating cash flows consistent with the reported earnings. Finally, the results indicated that company ownership, company listing, and the nature of financial statements do not affect cash-based earnings management.</p>
</abstract>

Managers are often employed many alternatives for earnings management following their objectives or the financial reporting objectives; the commonly used are the accrual-based and cash-based earnings management. The literature reveals that managers adopt the two strategies in different ways, suggesting a mixed relationship between them. Hence, this study investigates the relationship between the two strategies of earnings management in Algeria, whether it is a substitute or complementary. The study included 30 Algerian companies during 2011-2019, so a total of 270 firm-year observations were employed. Accrual-based earnings management was measured through the modified-Jones model, while cash-based earnings management was measured through the abnormal cash flows model. According to the results, Algerian companies engage more in accrual-based earnings management and employ the two strategies as substitutes, which explains the strong and negative effect of accrual-based on cash-based earnings management. We argue that companies engage first in accrual-based earnings management, and then they shift towards cash-based earnings management due to auditors’ scrutiny. Furthermore, we found a positive and a medium effect of return on equity on cash-based earnings management, which reflects the managers’ desire to adjust operating cash flows consistent with the reported earnings. Finally, the results indicated that company ownership, company listing, and the nature of financial statements do not affect cash-based earnings management.

Accrual-based and cash-based earnings management in Algeria: substitution or complementary

Croatian Review of Economic, Business and Social Statistics

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License.

Managers are often employed many alternatives for earnings management following their objectives or the financial reporting objectives; the commonly used are...

Accrual-based and cash-based earnings management in Algeria: substitution or complementary

Published Online: Jul 09, 2022

Page range: 1 - 17

Received: Oct 22, 2021

Accepted: Dec 03, 2021

DOI: https://doi.org/10.2478/crebss-2022-0001

Keywords
Algerian companies, accounting accruals, accrual-based earnings management, cash flows from operations, cash-based earnings management, return on equity

© 2022 Kimouche Bilal, published by Sciendo

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License.

Accrual-based and cash-based earnings management in Algeria: substitution or complementary

Published Online: Jul 09, 2022

Page range: 1 - 17

Received: Oct 22, 2021

Accepted: Dec 03, 2021

DOI: https://doi.org/10.2478/crebss-2022-0001

KeywordsAlgerian companies, accounting accruals, accrual-based earnings management, cash flows from operations, cash-based earnings management, return on equity

© 2022 Kimouche Bilal, published by Sciendo

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License.

Keywords
Algerian companies, accounting accruals, accrual-based earnings management, cash flows from operations, cash-based earnings management, return on equity