Abstract:
The purpose of this study is to examine whether commercial banks listed on Colombo stock
exchange engage in Earnings Management (EM) practices. EM has become a major concern
in the corporate world as plenty of avenues are available for managers to do so, despite the
fact that accounting standards have stipulated with clear guidelines, rules and principles.
Legitimacy theory provides a basis for corporate to appear as a legal person before
stakeholders in order to carry out their operations smoothly. Therefore, shareholders,
auditors, managers, accountants, and regulators are concerned whether financial statements
have been manipulated. Previous studies find that managers engage in earnings management
practices around the world by using different tools and techniques. Hence, this study attempts
to investigate whether there are adequate factors that can be used by potential stakeholders to
see whether banking companies listed on Colombo Stock Exchange engage in EM techniques.
Several earnings management tests are carried out to test the extent to which managers engage
in EM based on financial statements of ten banks for the years between 2010 to 2016. A
conceptual framework comprising various motives and factors for managers to engage in EM
practices developed based on literature review. Further, the study focuses on the awareness of
managers, auditors and shareholders about EM practices. Study does not find strong evidence
to conclude that commercial banks in Sri Lanka are engaging in EM practices. Major reason
is found to be stringent compliance requirements to be complied by banks form local and
international perspectives.
