Earnings Management for Sustainability: The Surplus Income Model of Sustainable Development

Purpose:The chapter’s objective is to develop a new model or approach to earnings management for sustainability. The challenges posed by climate change and environmental degradation have stimulated interest in sustainability. However, such interest has not led to the development of new models demonstrating how firms’ earnings management can contribute to sustainability and sustainable development. Methodology:The chapter develops a model demonstrating how earnings management can contribute to sustainability. The surplus income model uses income targeting as a channel through which the surplus income generated by a firm is allocated to a relevant sustainability activity or project. The author shows that a firm’s total income can be divided into the target and surplus income components. The author then explores the possible activities that firms may allocate surplus income to in the interest of sustainability. Finding:The surplus income model or approach allows a firm to contribute or donate to a relevant sustainability activity or project out of its surplus income. Under this model, managers are incentivised to generate surplus income from which they can contribute to a relevant sustainability activity or project, thereby making the firm a champion of sustainability. Originality:Previous studies have not examined how earnings management by firms can contribute to sustainability. This chapter fills this gap in the literature.