Earnings management: a strategic adaptation or deliberate manipulation?

Purpose - This study aims to clarify the relationship between ethical orientation and earnings management perception phenomenon in the organization. It discusses to what extent earnings management is considered as a strategic adaptation or deliberate manipulation in an organization. The study also aims to expand the domain of ethical perspective of earnings management by considering mediating and moderating role of investor sentiment and corporate social responsibility (CSR) as inward pressure and outward commitment surrounding the organization, adopting a combined perspective of strategic management and also accounting discipline than is normally found in the ethics and earnings management literature. Design/methodology/approach - The study opted for literature synthesis to define key concepts surrounding ethics and earnings management perception in the organization. Besides, it attempted to identify influential mediators and moderators in explaining the earnings management phenomenon in the organization. Consequently, the study identified the gaps in current research to draw upon a more holistic conceptual framework. The rationale for the research was justified within the body of research. Findings - The study suggested research propositions based on the literature synthesis in view of ethics and earnings management perception in the organization. More specifically, it has proposed a conceptual framework, explaining the relationship between ethical orientation and a multi-dimensional view of earnings management perception. It is envisaged that the mediating and moderating role of investor sentiment and CSR incorporated in this conceptual study will improve the predictive value of the proposed framework and offer additional insights about factors that inhibit or advance ethical orientation and earnings management practices in the organization. Research limitations/implications - This paper suffers from the obvious limitation of lacking empirical investigation. However, it does provide a theoretical rationale for the argument that alteration of earnings can be controlled if ethical orientation is emphasized in the organization apart from insulating internal and external pressures to manage such phenomenon from happening in the organization. Perhaps, the most important direction for future research is further extension and validation of this framework by performing an empirical investigation to produce newer insights into this phenomenon. Originality/value - This conceptual study is different from previous studies on the grounds it has considered unexplored issues linking inward pressures and outward commitments in explaining this phenomenon further. To bridge the critical knowledge gap of earnings management phenomenon, a mediating effect of investor sentiment as an inward pressure and a moderating role of CSR as an outward commitment are also integrated within the model. The proposed model neither formulated nor tested empirically in previous studies locally or, perhaps, globally, therefore, stands out as an original contribution in the study of ethical orientation and earnings management perception.