Financial Reporting Practices and Earnings Management: Assessing the Impact of the Covid-19 Pandemic on French Companies

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Financial Reporting Practices and Earnings Management: Assessing the Impact of the Covid-19 Pandemic on French Companies

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Themes

COVID-19, pandemic, earnings management, corporate finance, financial reporting, strategy, French company, accounting, audit, financial ecosystem

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Abstract

In the field of corporate finance, earnings management represents a crucial dimension that affects stakeholders' perception of a company's performance. This concept refers to legitimate or sometimes opportunistic accounting practices through which company management influences financial reports to meet certain objectives, such as analyst forecasts or internal targets. While some forms of earnings management can be considered an expression of the exercise of accounting judgment, there is a fine line between faithful representation of financial performance and manipulation that can mislead investors and regulators.
The advent of the Covid-19 pandemic has plunged companies around the world into a period of unprecedented uncertainty, significantly impacting their economic performance and, consequently, their financial reporting practices. In France, the health crisis has not only disrupted business operations but also led to a reconsideration of financial reporting standards, raising questions about the quality and reliability of financial information presented during this troubled period. The objective of this review is twofold: firstly, to examine in depth the theoretical framework and methodologies of earnings management in a normal context; and secondly, to assess how the pandemic has influenced these practices among French companies. Through this analysis, we seek to discern notable developments and anticipate potential implications for auditors, regulators, and the financial ecosystem as a whole.

Introduction
Results management: Theoretical framework and pre-pandemic practices
1. Basic principles and reasons for results management
2. Results management techniques used in France
Impact of Covid-19 on financial reporting
1. Effects of the pandemic on accounting practices
2. Regulatory changes and strategies of French companies
Case studies and empirical analyses
1. Specific examples of results management during the pandemic
2. Summary of recent research results
Conclusion
1. Implications for auditors and accountants
2. Limitations of current studies and suggestions for future research

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[...] "Public Oversight and Reporting Credibility: Evidence from the PCAOB Audit Inspection Regime." The Accounting Review. - Hribar, P., & Nichols, D. C. (2007). "The Use of Unsigned Earnings Quality Measures in Tests of Earnings Management." Journal of Accounting Research. - Jiang, H., Habib, A., & Zhou, D. (2009). "Accounting Information Quality and Its Relation to Investment Efficiency." Journal of Accounting and Economics. - Kang, Q., Liu, Q., & Qi, R. (2010). "Predicting Stock Price Crashes with Earnings Quality." Journal of Accounting and Economics. - Lassoued, Naima & Mehdi, Imen. [...]

[...] These studies illustrate the complexity of earnings management, which is shaped by a variety of incentive and regulatory factors. The reasons behind these practices are multiple and often interdependent, reflecting a delicate balance between communicating accurate financial information and managing stakeholders' perceptions. By understanding these principles and reasons, one can better evaluate how the Covid-19 pandemic has influenced the financial reporting practices of French companies, an area that requires thorough investigation to fully grasp the repercussions of this unprecedented crisis. [...]

[...] 2022-2081. International Monetary Fund, 2022. - Burgstahler, D., & Dichev, I. (1997). "Earnings Management to Avoid Earnings Decreases and Losses." Journal of Accounting and Economics. - Christensen, H. B., Nikolaev, V. V., & Wittenberg-Moerman, R. (2016). "Accounting Information in Financial Contracting: The Incomplete Contract Theory Perspective." Journal of Accounting Research. - Cohen, D. A., Dey, A., & Lys, T. [...]

[...] Institutions most affected by the pandemic had to revise their financial reporting options to reflect the direct impact of Covid-19 (Ozili, 2021). The impact of the pandemic on the stock returns of French companies was also highlighted, with particular attention to the sector of activity as the main focus of analysis (Sami, 2021). This led to segmented earnings management, where adjustments were specifically tailored to sectoral challenges. The reduction in on-site supervisory activities raised questions about management's disclosure of earnings forecasts. [...]

[...] (2019) illustrate the importance of earnings management within multinationals, which can offer insights into the strategies of French companies, often multinationals, in managing financial communication to their various stakeholders. Efforts by companies to maintain investor and stakeholder trust were also intensified. Transparent communication of the financial impacts of the pandemic, as well as measures taken to address it, became essential aspects of financial reporting, highlighting the necessity of full disclosure of risks and uncertainties, as discussed by Leuz et al. [...]

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