RELIGION AND EARNINGS MANAGEMENT - Some ... - Unitec

seen to provide a framework for any firm that would like to signal good business
conduct. Because of this open approach to allow any firm to receive Shariah status,
the Malaysian ICM has grown tremendously over the last ten years.
The use of ethical precepts, including religious codes, is not new to business.
Noreen (1988) explores the use of ethical and other frameworks in business and
accounting. He examines the boundaries of human behaviour in agency settings and
argues that agency contracts alone cannot restrain opportunistic behaviour. He
identifies religion, genetics and norms and conscience as enforcement mechanisms for
better ethical behaviour.
While many determinants of earnings management have been studied in the
literature (Dechow and Schrand, 2004), the effects of ethics on earnings management
is yet to be seriously examined. Only two studies have touched the subject, and these
are Cohen, Dey, and Lys (2008) and Cohen and Zarowin (2008). Both of these studies
show that SOx is having its desired effect on accruals management. They find that
abnormal accruals of US firms have decreased since the enactment of SOx in 2002.
Similarly, this study examines the effect of Shariah on the earnings management of
Malaysian listed companies.
Additionally, this paper extends the literature on the relation between religion
and accounting. This literature has made inroads into broad relationships between
accounting and particular religions like Christianity, Islam and Judaism or how
accounting is done for religious institutions (Carmona and Ezzamel, 2006). This paper
exploits a capital market setting where religious principles are being adopted for the
conduct of accounting and attempts to examine whether or not religious principles
affect the way accounting information is prepared.
Our sample is 1406 firm-year observations of Malaysian firms across a period
of five years. Shariah firms are required to attain and follow the religious ethical
guidelines of business conduct and accountability set by the Shariah Advisory Council
(SAC) of Malaysia. We take the classification of a firm as a Shariah firm as a sign of
commitment to the religious business norms and accountability processes. We find
that the quality of accounting earnings of firms is significantly associated with a
commitment to the religious business norms and accountability processes of Shariah.
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