Assessing the perceptions of the quality of reported earnings in Egypt

Purpose: The purpose of this paper is to assess respondents' perceptions of the quality of reported earnings in Egypt. To this end, three main issues are investigated: first, the potential incentives for engagement in earnings manipulation; second, the techniques most frequently used in manipulating earnings; and finally, the actions required to improve the quality of accounting information, including the reported earnings. Design/methodology/approach: A total of 16 semi-structured interviews are conducted in order to uncover any undisclosed issues and to supplement the results provided by a questionnaire survey distributed among three groups of respondents, namely, accounting academics, external auditors, and financial managers. Findings: The results indicate that the main incentives for manipulating earnings in Egypt are to enhance the chances of obtaining a bank loan; to sustain last year's profit performance; to report profits and to avoid reporting losses; and to achieve high-share valuation. The results also demonstrate that making inadequate provisions; capitalising rather than expensing expenditures; and overestimating the inventory value are the most frequently used techniques in earnings manipulation. Practical implications: The results could be of assistance to Egyptian external auditors and regulators in their attempt to limit the incidence of earnings manipulation. Originality/value: With a few exceptions, most of the literature on earnings management has been based on the US data. Therefore, research undertaken in a country such as Egypt, where the environment in many respects is different, may reveal a different perception of the quality of reported earnings and help determine how preparers in Egypt can further improve the quality of reported earnings.