Real Earnings Management and Discretionary Accruals Earnings Management: The Impact of Tax Incentives on Corporate Sustainability and SDG 16
List of Authors
Mariati Norhashim, Nahariah Jaffar, Salsiah Mohd Ali
Keyword
Real Earnings Management (REM), Discretionary Accruals (DEM), Tax Incentives, Corporate Sustainability, Sustainable Development Goal 16 (SDG 16)
Abstract
Many governments provide tax incentives to promote economic development. However, a major concern resulting from these incentives is a significant loss of tax revenue diminishing government funds available for essential services such as healthcare, education, and infrastructure. However, the effectiveness of tax incentives may not be directly observable through the information provided in the financial reporting as firms may use earnings management to manipulate. In other words, there is a lack of clarity in the role of tax incentives in earnings management practices. This study aims to investigate the relationship between discretionary earnings management (DEM), real earnings management (REM) and tax incentive. The study used data from firms listed on the Main Market of Bursa Malaysia for 2017, with additional analysis covering 2016–2018. This study employs multiple regression analysis with a moderating variable and t-tests to investigate whether tax incentive recipient status moderates the relationship DEM and REM. Regression analysis was used to investigate the relationships between MIDA status and earnings management practices. The findings show that tax incentive recipient status significantly moderates the relationship between REM and DEM, which is a crucial insight of this study. Specifically, the findings reveal that tax incentives may encourage firms to engage in REM, which, when used appropriately, can serve as a positive signal of operational strength, compliance, and managerial confidence. This suggests that tax incentives may still be beneficial. However, without effective monitoring, they can also lead to opportunistic financial reporting behaviours, undermining transparency and governance. This has implications for the achievement of the Sustainable Development Goals, particularly SDG 16, which emphasizes the importance of strong institutions, accountability, and transparency. Policymakers must therefore carefully examine tax incentive policies to guarantee consistency with the goals of SDG 16, which supports open government and robust institutions.