Original Research

Corporate social responsibility and earnings management of South African companies

Lauren A. Jordaan, Marna de Klerk, Charl J. de Villiers
South African Journal of Economic and Management Sciences | Vol 21, No 1 | a1849 | DOI: https://doi.org/10.4102/sajems.v21i1.1849 | © 2018 Lauren A. Jordaan, Marna De Klerk, Charl J. De Villiers | This work is licensed under CC Attribution 4.0
Submitted: 29 March 2017 | Published: 29 March 2018

About the author(s)

Lauren A. Jordaan, Department of Financial Accounting, College of Accounting Sciences, University of South Africa, South Africa
Marna de Klerk, Department of Accounting, University of Pretoria, South Africa
Charl J. de Villiers, Department of Accounting, University of Pretoria, South Africa; Graduate School of Management, Faculty of Business and Economics, The University of Auckland, New Zealand


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Abstract

Background: Enron was considered a strong corporate social performer when their infamous accounting scandal emerged in 2000. Literature suggests that companies use corporate social responsibility (CSR) to disguise corporate misconduct.

 

Aim and Setting: This study examines one type of corporate misconduct, namely, earnings management (EM). Prior studies have found significant associations between CSR performance and EM; however, none of these studies controlled for CSR disclosure. This study unbundles the effects of CSR performance and CSR disclosure on EM. To examine the relationship between CSR performance and CSR disclosures and EM of listed South African companies.

 

Methods: A company included on the Socially Responsible Investment (SRI)1 index is used as an indicator of CSR performance. Four measures of CSR disclosure are used.

 

Results and conclusion: The study tests both CSR performance and CSR disclosure against both real earnings management (REM) and accrual-based earnings management (AEM). CSR performance and earnings management: Companies with better CSR performance were more likely to engage in EM through income increasing discretionary accruals. This suggests that managers who inflate earnings may engage in CSR activities to avoid unwanted scrutiny from stakeholders. Companies with better CSR performance were less likely to engage in REM, suggesting that managers with better CSR performance regard the management of earnings through accruals that reverse in the next period less incriminating than managing earnings through actual company resources. CSR disclosure and earnings management: Companies that integrated their CSR disclosures more into their annual report engaged less in income decreasing discretionary accruals, suggesting that managers with incentives to make more CSR disclosures to reduce information asymmetry will also be less inclined to manage earnings.


Keywords

corporate social responsibility; earnings management; socially responsible investment; Johannesburg Stock Exchange

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Crossref Citations

1. The association between corporate social responsibility reporting and firm value for South African firms
Riana Horn, Marna De Klerk, Charl De Villiers
South African Journal of Economic and Management Sciences  vol: 21  issue: 1  year: 2018  
doi: 10.4102/sajems.v21i1.2236