Management of annual reported income in the UK : the search for indicators
The main purpose of this research was to ascertain whether users of reported income are receiving measurement of past activity that is free from management bias. This research consisted of two major parts, namely the theoretical and the empirical. In the theoretical part, attempts were made: (i) to determine the roots of the theoretical propositions for empirical investigation and (ii) to examine, theoretically, the assertion that managers are able to manipulate reported results through acceptable accounting means. In this part, it was argued that managers of listed firns are more likely to smooth reported income and bias their accounting policies towards income-increasing methods, while managers of unlisted firms are more likely to bias their accounting policies towards income-decreasing methods. Also it was argued that managers are able to manipulate reported income through acceptable accounting means. In the empirical part, an attempt was made to determine the relative adherence of listed and unlisted firms to one of three reporting strategies, namely smoothing of, increase of and decrease of reported income. In this regard, two principal hypotheses were developed and tested. The first hypothesis stated that the proportion of listed firms with relatively smooth income streams is significantly higher than that of unlisted firms. The empirical findings are consistent with this hypothesis for all objects of smoothing considered in this research. Furthermore, the results suggest that ordinary income is the most common object of smoothing among listed firms. The second hypothesis was that there is a significant difference in the means of the profitability rate between the two sets of firms. The empirical findings are consistent with this hypothesis. Also,, the magnitude and the direction of the differences in the profitability rates indicate that listed firms report higher profitability rates than unlisted firms and the observations of the profitability rates among listed firms are more concentrated around their means than those of unlisted firms. Based on the findings of this research, it is justifiable to conclude that users of reported income are receiving measurement of past activity that is not free from management bias.