The influence of fraud triangle factors on real earnings management

Download This Article

Suhaily Hasnan ORCID logo, Nurshylah Othman, Alfiatul Rohmah Mohamed Hussain ORCID logo, Mazurina Mohd Ali ORCID logo

Creative Commons License
This work is licensed under a Creative Commons Attribution 4.0 International License.


This study aims to examine the relationship between factors of pressure, opportunity, and rationalization, and the occurrence of real earnings management among Malaysian public listed companies. The study used a sample of 557 Malaysian public listed companies between 2017 and 2019, comprising a total of 1,671 firm-year observations. Replicating a study by Khanh and Nguyen (2018), but not limited to external governance of audit quality, the study added to the knowledge of real earnings management by taking into account the effect of internal governance such as board independence and multiple directorships. And, following Roychowdhury (2006), real earnings management is measured by abnormal cash flow from operations, abnormal production costs, and abnormal discretionary expenditure. The results from regression analysis show that there is a negative and significant association between financial performance, measured by return on assets, and real earnings management. In addition, the results also show that there is a positive and significant association between audit quality, measured by audit firm size, and real earnings management. The findings of this study provide useful insights for the investors to reassess firm corporate governance, and for the regulators to reconsider the current regulations with regard to the practice of real earnings management.

Keywords: Earnings Management, Financial Reporting, Corporate Governance, External Audit, Regression Analysis, Malaysia

Authors’ individual contribution: Conceptualization — S.H.; Methodology — N.O. and S.H.; Formal Analysis — N.O. and S.H.; Writing — Original Draft — N.O., S.H., and A.R.M.H.; Writing — Review & Editing — S.H. and M.M.A.; Supervision — S.H.; Project Administration — S.H. and A.R.M.H.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

Acknowledgements: The Authors would like to express their gratitude to the Research Management Centre, Universiti Teknologi MARA, for funding the research project through the Strategic Research Partnership Grant (100-RMC 5/3/SRP (080/2021). Our appreciation also goes to the Faculty of Accountancy, Universiti Teknologi MARA, for facilitating this research project.

JEL Classification: M41

Received: 27.12.2021
Accepted: 05.04.2022
Published online: 08.04.2022

How to cite this paper: Hasnan, S., Othman, N., Hussain, A. R. M., & Ali, M. M. (2022). The influence of fraud triangle factors on real earnings management. Journal of Governance & Regulation, 11(2), 94–106.