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Earnings Management for Sustainability: The Surplus Income Model of Sustainable Development

In: Smart Analytics, Artificial Intelligence and Sustainable Performance Management in a Global Digitalised Economy

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  • Peterson K. Ozili

Abstract

Purpose:The chapter’s objective is to develop a new model or approach to earnings management for sustainability. The challenges posed by climate change and environmental degradation have stimulated interest in sustainability. However, such interest has not led to the development of new models demonstrating how firms’ earnings management can contribute to sustainability and sustainable development. Methodology:The chapter develops a model demonstrating how earnings management can contribute to sustainability. The surplus income model uses income targeting as a channel through which the surplus income generated by a firm is allocated to a relevant sustainability activity or project. The author shows that a firm’s total income can be divided into the target and surplus income components. The author then explores the possible activities that firms may allocate surplus income to in the interest of sustainability. Finding:The surplus income model or approach allows a firm to contribute or donate to a relevant sustainability activity or project out of its surplus income. Under this model, managers are incentivised to generate surplus income from which they can contribute to a relevant sustainability activity or project, thereby making the firm a champion of sustainability. Originality:Previous studies have not examined how earnings management by firms can contribute to sustainability. This chapter fills this gap in the literature.

Suggested Citation

  • Peterson K. Ozili, 2023. "Earnings Management for Sustainability: The Surplus Income Model of Sustainable Development," Contemporary Studies in Economic and Financial Analysis, in: Smart Analytics, Artificial Intelligence and Sustainable Performance Management in a Global Digitalised Economy, volume 110, pages 145-158, Emerald Group Publishing Limited.
    • Handle: RePEc:eme:csefzz:s1569-37592023000110b009
    DOI: 10.1108/S1569-37592023000110B009
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    References listed on IDEAS

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    1. Subhash Abhayawansa & Carol A. Adams & Cristina Neesham, 2021. "Accountability and governance in pursuit of Sustainable Development Goals: conceptualising how governments create value," Accounting, Auditing & Accountability Journal, Emerald Group Publishing Limited, vol. 34(4), pages 923-945, March.
    2. Burritt, Roger & Schaltegger, Stefan, 2014. "Accounting towards sustainability in production and supply chains," The British Accounting Review, Elsevier, vol. 46(4), pages 327-343.
    3. Burchell, Stuart & Clubb, Colin & Hopwood, Anthony & Hughes, John & Nahapiet, Janine, 1980. "The roles of accounting in organizations and society," Accounting, Organizations and Society, Elsevier, vol. 5(1), pages 5-27, January.
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    5. Chung, Richard & Firth, Michael & Kim, Jeong-Bon, 2002. "Institutional monitoring and opportunistic earnings management," Journal of Corporate Finance, Elsevier, vol. 8(1), pages 29-48, January.
    6. Alexander Bergmann & Peter Posch, 2018. "Mandatory Sustainability Reporting in Germany: Does Size Matter?," Sustainability, MDPI, vol. 10(11), pages 1-20, October.
    7. El Sood, Heba Abou, 2012. "Loan loss provisioning and income smoothing in US banks pre and post the financial crisis," International Review of Financial Analysis, Elsevier, vol. 25(C), pages 64-72.
    8. repec:eme:jaar00:jaar-06-2020-0116 is not listed on IDEAS
    9. Amr Elalfy & Olaf Weber & Sean Geobey, 2021. "The Sustainable Development Goals (SDGs): a rising tide lifts all boats? Global reporting implications in a post SDGs world," Journal of Applied Accounting Research, Emerald Group Publishing Limited, vol. 22(3), pages 557-575, February.
    10. John Dumay & MD Amir Hossain, 2019. "Sustainability Risk Disclosure Practices of Listed Companies in Australia," Australian Accounting Review, CPA Australia, vol. 29(2), pages 343-359, June.
    11. Burchell, Stuart & Clubb, Colin & Hopwood, Anthony G., 1985. "Accounting in its social context: Towards a history of value added in the United Kingdom," Accounting, Organizations and Society, Elsevier, vol. 10(4), pages 381-413, October.
    12. Kaveen Bachoo & Rebecca Tan & Mark Wilson, 2013. "Firm Value and the Quality of Sustainability Reporting in Australia," Australian Accounting Review, CPA Australia, vol. 23(1), pages 67-87, March.
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    More about this item

    Keywords

    Earnings management; surplus income model; income smoothing; income targeting; tax rebate; environment; sustainability; sustainable development; accounting; managerial discretion;
    All these keywords.

    JEL classification:

    • M10 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - General
    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M48 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Government Policy and Regulation
    • Q01 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Sustainable Development

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