IDEAS home Printed from https://ideas.repec.org/a/taf/acctbr/v47y2017i7p831-855.html
   My bibliography  Save this article

Regulatory incentives and financial reporting quality in public healthcare organisations

Author

Listed:
  • Margaret J. Greenwood
  • Richard M. Baylis
  • Lei Tao

Abstract

English National Health Service Foundation Trusts are subject to a regulatory regime in which the level of monitoring and intervention is determined by performance against two key performance metrics: a ‘financial risk rating’, based on a number of performance metrics, such as the reported surplus margin and return on assets, and a ‘prudential borrowing limit’. In this paper, we investigate the variation in financial reporting quality, proxied by discretionary accruals, with the incentives introduced by this regime. We find: first, that discretionary accruals are managed to report small surpluses; second, that, consistent with the avoidance of regulatory intervention in both the short and medium term, discretionary accruals are more positive when pre-managed performance is below intervention triggering thresholds and more negative when well above threshold; third, that, despite a move away from financial breakeven as the primary performance objective, there remains an aversion to small loss reporting. We further find that the level of discretionary accruals is driven by two metrics of strategic significance: the surplus margin (a measure of retained earnings) and the prudential borrowing limit (a measure of borrowing capacity).

Suggested Citation

  • Margaret J. Greenwood & Richard M. Baylis & Lei Tao, 2017. "Regulatory incentives and financial reporting quality in public healthcare organisations," Accounting and Business Research, Taylor & Francis Journals, vol. 47(7), pages 831-855, November.
  • Handle: RePEc:taf:acctbr:v:47:y:2017:i:7:p:831-855
    DOI: 10.1080/00014788.2017.1343116
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1080/00014788.2017.1343116
    Download Restriction: Access to full text is restricted to subscribers.

    File URL: https://libkey.io/10.1080/00014788.2017.1343116?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Jones, Jj, 1991. "Earnings Management During Import Relief Investigations," Journal of Accounting Research, Wiley Blackwell, vol. 29(2), pages 193-228.
    2. Farshid Navissi, 1999. "Earnings Management under Price Regulation," Contemporary Accounting Research, John Wiley & Sons, vol. 16(2), pages 281-304, June.
    3. Carol A. Marquardt & Christine I. Wiedman, 2004. "How Are Earnings Managed? An Examination of Specific Accruals," Contemporary Accounting Research, John Wiley & Sons, vol. 21(2), pages 461-491, June.
    4. Eldenburg, Leslie & Hermalin, Benjamin E. & Weisbach, Michael S. & Wosinska, Marta, 2004. "Governance, performance objectives and organizational form: evidence from hospitals," Journal of Corporate Finance, Elsevier, vol. 10(4), pages 527-548, September.
    5. Hoerger, Thomas J., 1991. "'Profit' variability in for-profit and not-for-profit hospitals," Journal of Health Economics, Elsevier, vol. 10(3), pages 259-289, October.
    6. Patricia M. Dechow & Amy P. Hutton & Jung Hoon Kim & Richard G. Sloan, 2012. "Detecting Earnings Management: A New Approach," Journal of Accounting Research, Wiley Blackwell, vol. 50(2), pages 275-334, May.
    7. Ranjani Krishnan & Michelle H. Yetman, 2011. "Institutional Drivers of Reporting Decisions in Nonprofit Hospitals," Journal of Accounting Research, Wiley Blackwell, vol. 49(4), pages 1001-1039, September.
    8. Kasznik, R, 1999. "On the association between voluntary disclosure and earnings management," Journal of Accounting Research, Wiley Blackwell, vol. 37(1), pages 57-81.
    9. Kothari, S.P. & Leone, Andrew J. & Wasley, Charles E., 2005. "Performance matched discretionary accrual measures," Journal of Accounting and Economics, Elsevier, vol. 39(1), pages 163-197, February.
    10. Burgstahler, David & Dichev, Ilia, 1997. "Earnings management to avoid earnings decreases and losses," Journal of Accounting and Economics, Elsevier, vol. 24(1), pages 99-126, December.
    11. Black, Julia & Baldwin, Robert, 2010. "Really responsive risk-based regulation," LSE Research Online Documents on Economics 27632, London School of Economics and Political Science, LSE Library.
    12. Leone, Andrew J. & Van Horn, R. Lawrence, 2005. "How do nonprofit hospitals manage earnings?," Journal of Health Economics, Elsevier, vol. 24(4), pages 815-837, July.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Pierre Donatella & Torbjörn Tagesson, 2021. "CFO characteristics and opportunistic accounting choice in public sector organizations," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 25(2), pages 509-534, June.
    2. Anessi-Pessina, Eugenio & Steccolini, Ileana, 2024. "Do conformity and bailouts affect misreporting? The case of public health-care organisations," The British Accounting Review, Elsevier, vol. 56(3).
    3. Zubir Azhar & Ervina Alfan & Krishnen Kishan & Nurul Husna Assanah, 2022. "Accrual Accounting at Different Levels of the Public Sector: A Systematic Literature Review," Australian Accounting Review, CPA Australia, vol. 32(1), pages 36-62, March.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Hofmann, Mary Ann & McSwain, Dwayne, 2013. "Financial disclosure management in the nonprofit sector: A framework for past and future research," Journal of Accounting Literature, Elsevier, vol. 32(1), pages 61-87.
    2. Jorge Farinha & Luis Filipe Viana, 2006. "Board structure and modified audit opinions: the case of the Portuguese Stock Exchange," CEF.UP Working Papers 0609, Universidade do Porto, Faculdade de Economia do Porto.
    3. Jonas Heese, 2017. "The Role of Overbilling in Hospitals’ Earnings Management Decisions," Harvard Business School Working Papers 18-026, Harvard Business School.
    4. Bruce K. Bennett & Michael E. Bradbury, 2010. "An analysis of the reasons for the asymmetries surrounding earnings benchmarks," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 50(3), pages 529-554, September.
    5. Amanda W. Beck, 2018. "Opportunistic financial reporting around municipal bond issues," Review of Accounting Studies, Springer, vol. 23(3), pages 785-826, September.
    6. Davis, Frederick & Khadivar, Hamed, 2024. "Accrual and real earnings management by rumored takeover targets," International Review of Financial Analysis, Elsevier, vol. 92(C).
    7. Anessi-Pessina, Eugenio & Steccolini, Ileana, 2024. "Do conformity and bailouts affect misreporting? The case of public health-care organisations," The British Accounting Review, Elsevier, vol. 56(3).
    8. Dechow, Patricia & Ge, Weili & Schrand, Catherine, 2010. "Understanding earnings quality: A review of the proxies, their determinants and their consequences," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 344-401, December.
    9. Cannon, James N. & Lamboy-Ruiz, Melvin A. & Watanabe, Olena V., 2022. "Ownership type and earnings management in U.S. hospitals," Advances in accounting, Elsevier, vol. 58(C).
    10. Campa, Domenico & Camacho-Miñano, María-del-Mar, 2015. "The impact of SME’s pre-bankruptcy financial distress on earnings management tools," International Review of Financial Analysis, Elsevier, vol. 42(C), pages 222-234.
    11. Yasmin Jamadar & Tze San Ong & Asna Atqa Abdullah & Fakarudin Kamarudin, 2022. "Earnings and discretionary accruals," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 43(2), pages 431-439, March.
    12. Timothy A. Seidel & Chad A. Simon & Nathaniel M. Stephens, 2020. "Management bias across multiple accounting estimates," Review of Accounting Studies, Springer, vol. 25(1), pages 1-53, March.
    13. Li Yu (Colly) He & Sue Wright & Elaine Evans, 2018. "Is fair value information relevant to investment decision-making: Evidence from the Australian agricultural sector?," Australian Journal of Management, Australian School of Business, vol. 43(4), pages 555-574, November.
    14. Vasilescu, Camelia & Millo, Yuval, 2016. "Do industrial and geographic diversifications have different effects on earnings management? Evidence from UK mergers and acquisitions," International Review of Financial Analysis, Elsevier, vol. 46(C), pages 33-45.
    15. T.N. Malofeeva, 2018. "The Impact of IFRS Adoption on Earnings Management in Russia," European Research Studies Journal, European Research Studies Journal, vol. 0(2), pages 147-164.
    16. Susana Callao & José I. Jarne & David Wróblewski, 2019. "A New Perspective on Earnings Management in Emerging European Countries: Investigation on Environmental Factors that Explain Differences in Earnings Management," Journal of Accounting, Business and Finance Research, Scientific Publishing Institute, vol. 7(2), pages 59-81.
    17. Huai Zhang & Jin Zhang, 2023. "Political corruption and accounting choices," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 50(3-4), pages 443-481, March.
    18. Jacob, John & Jorgensen, Bjorn N., 2007. "Earnings management and accounting income aggregation," Journal of Accounting and Economics, Elsevier, vol. 43(2-3), pages 369-390, July.
    19. Hervé Stolowy & Gaetan Breton, 2000. "A Framework for the Classification of Accounts Manipulations," Working Papers hal-00597249, HAL.
    20. Griffin, Paul A. & Hong, Hyun A. & Liu, Yun & Ryou, Ji Woo, 2021. "The dark side of CEO social capital: Evidence from real earnings management and future operating performance," Journal of Corporate Finance, Elsevier, vol. 68(C).

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:taf:acctbr:v:47:y:2017:i:7:p:831-855. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Longhurst (email available below). General contact details of provider: http://www.tandfonline.com/RABR20 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.