earnings management at dutch fundraising institutions: the - cbf

Vrije Universiteit Amsterdam

Faculty of Economics and Business Administration

Thesis: Master of Science Accounting & Control

Earnings Management at Dutch Fundraising Institutions: the Impact

of Supervisory Board & Audit Committee Characteristics

Author: Frederica Sophia van Os

Student number: 1755226

Email: [email protected]

Supervisor: Drs. D.R. Boterenbrood RA

2 Earnings Management at Dutch Fundraising Institutions: the Impact of Supervisory Board & Audit Committee Characteristics

Frederica Sophia van Os

‘Is betere controle op

goede doelen nodig?’ NRC 03/05/2009

‘Veel ergernis over goede doelen’

De Telegraaf 08/01/2010

‘Unicef beloont directeur ook met variabele bonussen’ De Volkskrant 30/06/2008

‘Zes ton voor vertrek bij Hartstichting’

NRC 02/12/2009

'Pink Ribbon geeft maar fractie van

opgehaalde miljoenen uit aan onderzoek' De Volkskrant 16/11/2011

‘Geld tsunami -fonds naar walvisjagers’

De Volkskrant 08/12/2011

‘Goede doelen zetten zelf alle salarissen van directie online’

Het Parool 16/09/2011

‘Goede doelen, dubieuze beleggingen’ NRC 29/11/2011

‘Salaris directeur Rode Kruis onder dwang naar beneden’

Trouw 05/07/2010

‘Hulporganisatie SNV weigert salaris te verlagen’ Trouw 05/07/2010

‘Tonnen Nederlands hulpgeld

zoek in Zuid-Afrika’ NU.nl 07/07/2011

http://www.volkskrant.nl/vk/nl/2672/Wetenschap-Gezondheid/article/detail/3037621/2011/11/16/Pink-Ribbon-geeft-maar-fractie-van-opgehaalde-miljoenen-uit-aan-onderzoek.dhtml

http://www.volkskrant.nl/vk/nl/2672/Wetenschap-Gezondheid/article/detail/3037621/2011/11/16/Pink-Ribbon-geeft-maar-fractie-van-opgehaalde-miljoenen-uit-aan-onderzoek.dhtml

http://www.volkskrant.nl/vk/nl/2844/Archief/archief/article/detail/3069409/2011/12/08/Geld-tsunami-fonds-naar-walvisjagers.dhtml



Abstract

Earnings management is an excessively investigated subject in the profit sector. In this thesis earnings

management is examined at Dutch fundraising institutions. An important incentive for fundraising

institutions to engage in earnings management and to manage earnings towards zero or a small

positive result is to show that all funds are required to fulfill the social tasks and to attract funds in the

future. The distribution approach was executed and results indicate that the distribution of the earnings

are discontinue around zero. Discretionary accruals and abnormal expenses (management &

administration, fundraising and spending on objectives) are used in this thesis as measures of earnings

management. Based on chi-squared tests it can be concluded that there is a relation between groups

and discretionary accruals & abnormal expenses: managers of fundraising institutions use

discretionary accruals and abnormal expenses in order to come close to zero or a small positive result.

Regressions results indicate a negative relationship between the CEO tenure and discretionary

accruals. Evidence suggests a positive relationship between the number of supervisory board meetings

and discretionary accruals. A positive relationship is found between the existence of an audit

committee and abnormal management and administration expenses. Financial expertise of an audit

committee is negatively related to abnormal management and administration expenses.

Key words: fundraising institutions, (real) earnings management, discretionary accruals, abnormal

expenses, supervisory board and audit committee.



Preface

This thesis is the final product in the fulfillment of the requirements of the degree Master of Science in

Accounting and Control at the Vrije Universiteit Amsterdam.

I have chosen to write my master thesis about earnings management at Dutch fundraising institutions

and its relation with characteristics of the supervisory board and the audit committee. This topic

seemed to me very interesting and challenging. Especially because this topic is an unexposed subject

in the literature. I worked on the thesis with a lot of pleasure and there are many people to thank for

their considerable support I received during the project.

First of all, I would like to thank my supervisor at the Vrije Universiteit Amsterdam, Rob

Boterenbrood, for his guidance, critical comments and good advice throughout the process. I have

written this thesis as an intern at PwC The Hague and I would like to thank them for the facilities they

offered while I was writing my thesis. I would like to express my gratitude to my coach at PwC,

Maartje Verhoeven for her guidance and advice. Especially a word of thanks to my parents; they

always have supported me in everything.

Voorburg, July 2012




Table of contents

Abstract 3

Preface 4

Chapter 1 – Introduction 8

1.1 Introduction and Purpose 8

1.2 Research Question and Sub Questions 8

1.3 Contribution to the Literature 9

1.4 Structure of the Thesis 11

Chapter 2 – Fundraising Institutions in the Netherlands 12

2.1 Introduction 12

2.2 Defining Fundraising Institutions and the Fundraising Sector in the Netherlands 12

2.3 The Central Bureau Fundraising 14

2.4 The Association of Fundraising Institutions 15

2.5 Dutch Accounting Standards for Fundraising Institutions (RJ 650) 16

2.6 Stakeholders of Fundraising Institutions 17

Chapter 3 – Earnings Management 18

3.1 Introduction 18

3.2 Information Asymmetry at Fundraising Institutions 18

3.3 Positive Accounting Theory 19

3.4 Defining Earnings Management 20

3.5 Incentives to Engage in Earnings Management 21

3.6 Earnings Management Trough Accruals 22

3.7 Earnings management Through Real Activities 26

Chapter 4 – Earnings Management at Non-profit Institutions 28

4.1 Introduction 28

4.2 Research related to Earnings Management at Non-profit Institutions 28

4.3 Incentives to Engage in Earnings Management at Fundraising Institutions 30

4.4 Expectations of Earnings Management at Non-profit Institutions 31



Chapter 5 – Corporate Governance at Fundraising Intuitions 34

5.1 Introduction 34

5.2 Corporate Governance at Non-profit Firms 35

5.3 Governance structures at Dutch Fundraising Institutions 35

Chapter 6 – Hypotheses Development 37

6.1 Introduction 37

6.2 Earnings Management at Dutch Fundraising Institutions 37

6.3 Characteristics of the Supervisory Board & Audit Committee on Earnings Management 38

6.3.1 Size of Supervisory Board and the Existence of an Audit Committee 38

6.3.2 Supervisory Board & Audit Committee Meetings Diligence 40

6.3.3 Tenure of the CEO and the Audit Committee Members 42

6.3.4 Financial Expertise of the Audit Committee 43

Chapter 7 – Research Methodology 45

7.1 Introduction 45

7.2 Sample Selection 45

7.3 Research Designs 46

7.3.1 Income Distribution 46

7.3.2 Models to Detect Earnings Management Through Discretionary Accruals and

Abnormal Expenses 47

7.3.3 Groups and the Direction of Discretionary Accruals and Abnormal Expenses 49

7.3.4 Supervisory Board &Audit Committee Characteristics on Earnings Management 51

Chapter 8 – Results 53

8.1 Introduction 53

8.2 Income Distribution 53

8.3 Models to Detect Earnings Management Through Discretionary Accruals and Abnormal

Expenses 56

8.4 Groups and Direction Discretionary Accruals and Abnormal Expenses 57

8.5 Supervisory Board an Audit Committee Characteristics on Earnings Management 60



Chapter 9 – Conclusion, Limitations and Implications for Future Research 65

References 70

Appendix A – Model for the Balance sheet and the Profit and Loss statement 76

Appendix B – Translation of Governance Bodies 78

Appendix C – Literature Overview 79

Appendix D – Explanation Normal Discretionary Expenses Model of Roychowdhury (2006) 85

Appendix E – Earnings Distribution 86

Appendix F – Assumptions of the (Modified) Jones Model and Normal Expenses Models 87

Appendix G – Significance of the (Modified) Jones Model and Normal Expenses Models 94

Appendix H – Chi-square test to Compare Groups 100

Appendix I – Regressions Discretionary Accruals and Abnormal Expenses, All dependent 102

Variables Included



Chapter 1 – Introduction

1.1 Introduction and Purpose

Publicly available financial reports play an important role by mitigating the inherent principal-agent

conflict within institutions. One would expect that the bottom line for non-profit institutions is less

important compared to profit-making companies, since non-profit institutions have no investors who

expect a certain return on investments. In addition, in the profit literature one can find that earnings are

important since they are used as a summary measure of firm performance by a wide range of users

(Bissessur, 2008). However, reported earnings of non-profit institutions serve a number of important

purposes. Yetman and Yetman (2011); Leone and Van Horn (2005) investigated non-profit institutions

in the United States and they concluded that stakeholders use the reported earnings for credit

evaluation, managerial assessments and donation decisions. Furthermore, accounting information can

assist stakeholders in monitoring a non-profit institution and evaluating whether resources are being

used in the most efficient and effective manner (Krishnan and Yetman, 2011).

One can argue that managers of fundraising institutions manage earnings to report results that are

close to zero and nonnegative. Managers with small losses will manage earnings upwards so that

earnings are not negative to avoid violating zero profit constraint. Managers of fundraising institutions

can exploit the agency problem by managing earnings (through accruals or real variables).

Stakeholders make their decisions based on the result of the institutions, however due to the actions of

the management donors are not able to make good decisions.

1.2 Research Question and Sub Questions

This thesis is focussed on whether earnings management is applied at fundraising institutions: earnings

management through accruals and real variables will be investigated. Furthermore, characteristics of

the supervisory board and the audit committee and the relation with (real) earnings management will

be subject of this thesis. The following question will be the research question in the thesis:

“What is the effect of supervisory board & audit committee characteristics on earnings

management through discretionary accruals and abnormal expenses at Dutch fundraising

institutions?”

The following sub-questions will be answered in the thesis:

1. How are Dutch fundraising institutions organized and who are stakeholders?

2. What is earnings management, what are incentives to engage in earnings management for

managers and how can earnings be managed?



3. What are motives for managers at non-profit institutions and specifically fundraising

institutions to engage in earnings management?

4. Why is corporate governance needed at non-profit institutions and how is corporate

governance organized at Dutch fundraising institutions?

5. What are the conclusions of prior research concerning the supervisory board and the audit

committee characteristics and their effect on earnings management?

6. What is the impact of the size of supervisory board and the existence of the audit committee on

earnings management at Dutch fundraising institutions?

7. What is the impact of the frequency of the supervisory board and audit committee meetings on

earnings management Dutch fundraising institutions?

8. What is the impact of the tenure of the Chief Executive Officer (CEO) (In Dutch: voorzitter

Raad van Bestuur) and the audit committee members on earnings management at Dutch

fundraising institutions?

9. What is the impact of financial expertise of the audit committee members on earnings

management at Dutch fundraising institutions?

1.3 Contribution to the Literature

Throughout the years extensive research has been conducted with respect to earnings management.

These studies focus on finding evidence about the existence of earnings management and the

incentives to engage in earnings management. These studies are mostly conducted in the profit sector,

the non-profit sector is less investigated by researchers. Although earnings management research in

non-profit institutions is rather scarce in comparison to for-profit institutions, researchers have found

its existence. Research related to earnings management in non-profit institutions is done in different

sectors, e.g. health care (Leone and Van Horn, 2005; Eldenburg, Gunny, Hee and Soderstorm, 2011)

and municipalities (Vinnari and Näsi, 2008). Differences between the incentives to engage in earnings

management at non-profit institutions and profit institutions are found in prior literature. For example,

managers of profit-institutions have incentives to report a pattern of continuous increases in earnings

and engage in income smoothing to show constant growth. However, managers of non-profit

institutions have incentives to manage earnings around a fixed point above zero. Furthermore, non-

profit institutions have no incentive to avoid reporting earnings decreases as long as current period

earnings are above zero. This is in contrast with profit firms, they are motivated by the equity markets

to avoid small losses (Leone and Van Horn, 2005) .

Despite research conducted at some non-profit sectors, there is a very small base of literature on

earnings management at fundraising institutions. Prior research at fundraising institutions is related to

discretionary accounting methods to maximize the program expense ratios and efficiency ratios (e.g.



Trussel, 2003; Baber, Roberts and Visvanathan, 2001, Jones and Roberts, 2006). Nevertheless,

earnings management through discretionary accruals and abnormal expenses (which are the main

methods used to measure earnings management), is not investigated at fundraising institutions.

Although earnings management at some non-profit sectors is investigated, the fundraising sector is a

different part of the non-profit sector: fundraising institutions have to comply with other financial

reporting standards, have other stakeholders, and receive income in another way compared to other

non-profit institutions (e.g. hospitals). Because fundraising institutions are another type of non-profit

institutions within the non-profit sector, investigating this institutions can help in getting a more

complete insight into non-profit institutions. For example, maybe managers of fundraising institutions

have other incentives to manage earnings compared to other non-profit institutions. So, investigating

earnings management at fundraising institutions can give another insight into non-profit institutions:

differences could exist between the (non-)profit sector and fundraising institutions.

In addition, research has been done with respect to earnings management and corporate governance

aspects. These studies focus on finding a relation between characteristics of the supervisory board &

audit committee and earnings management in the profit sector outside the Netherlands (e.g. Xie,

Davidson, DaDalt, 2003, Lin, Li and Yang, 2006; Vafeas, 2005; Klein, 2002, Machuga and Teitel,

2009). Although a substantial body of accounting literature examines the relationship between

governance and reporting quality in the for-profit setting, there is little evidence on the effects of

governance on non-profit reporting (Yetman and Yetman, 2011). Earnings management and the

impact of supervisory and audit committee characteristics on earnings management in the non-profit

sector, and more specifically at fundraising institutions in the Netherlands, remains an unanswered

question. This study will examine whether the characteristics related to the supervisory board and the

audit committee, are associated with earnings management in the fundraising sector.

Furthermore, why choose the Netherlands as a research field? The headlines of the articles on page 2

were published in several newspapers in recent years. Salaries, bonuses and inappropriate spending of

raised money by Dutch fundraising institutions became subject of public debate. It appears from the

headlines that the public is interested in Dutch fundraising institutions. Another interesting aspect of

the fundraising sector is the size of the sector. 831 fundraising institutions are registered with the

Central Bureau Fundraising (In Dutch: Centraal Bureau Fondsenwerving) (hereafter: CBF) and they

raised 3.7 billion EUR in 2010 (CBF, 2011).



1.4 Structure of the Thesis

The thesis will be divided into literature study and empirical research. Chapter 2 will provide some

background of fundraising institutions. The definition of financial institutions will be given and

important bodies in the sector and their main tasks will be described. Subsequently, the financial

reporting standards are described and the stakeholders of fundraising institutions will be described.

Chapter 3 will be focussed on earnings management. The definition of earnings management as used

throughout this thesis will be given and incentives to engage in earnings management are discussed.

Furthermore, the chapter will be focussed on the detection of earnings management. Chapter 4 will

discuss earnings management at non-profit institutions and specifically at fundraising institutions.

Corporate governance structures and the need for governance at non-profit institutions and Dutch

fundraising institutions will be subject of chapter 5. In chapter 6 hypotheses are composed.

Furthermore, this chapter will consist of the theory and the relevant prior research related to the

characteristics of the supervisory board and the audit committee which can be related to earnings

management. Chapter 7 described the research methodology. In chapter 8, the results of the analyses

will be described and discussed. Finally in the last chapter a conclusion will be drawn up, limitations

of the research will be described ,and recommendations for further research will be given.



Chapter 2 – Fundraising institutions in the Netherlands

2.1 Introduction

This thesis will be focussed on Dutch fundraising institutions. For that reason it is important to

understand the fundraising sector in the Netherlands. The purpose of this chapter is to set out some

background on the Dutch fundraising sector. An answer on sub question 1 will be given: How are

Dutch fundraising institutions organized and who are stakeholders?

At first, definitions of fundraising institutions will be given. Subsequently, different bodies which have

an influence on Dutch fundraising institutions will be pointed out. Furthermore, the Dutch Accounting

Standards for Fundraising Institutions will be part of this chapter. Finally, the stakeholders of

fundraising institutions will be described.

2.2 Defining Fundraising Institutions and the Fundraising Sector in the Netherlands

There is not one clear definition of what a fundraising institution is. The Dutch Accounting Standard

Board, Donor Association and the CBF give the following definitions of fundraising institutions:

“A fundraising institution is a private organization that is not profit oriented and that makes

appeal to public generosity to realize its goals. The raised money is voluntary donated , there is no or

not a proportional consideration for the donated goods or services and no rights for care or aid can

be obtained” (RJ, Richtlijn 650.110).

“A fundraising institution is a charity that tries to realize its goals by approaching

individuals, companies or funds to donate money or goods. The institution makes an appeal to the

willingness of public donations” (Website: Donor Association).

“A fundraising institution is an association or foundation established under Dutch law, with

full legal capacity for realization of charitable, cultural, scientific or other general benefit objectives,

by making appeal to public generosity. Fundraising means that the received funds are donated

voluntary and there is no or no proportional consideration for the donated goods or services and no

rights for care or aid can be obtained”(Website: CBF).

All the definitions above have in common that fundraising institutions make an appeal to the public

generosity in order to achieve their objectives and that raised money is voluntary donated without a

reciprocal transfer. However, Karman and Swachten in Hoogendoorn, Klaassen and Krens (2004)

added a component; they emphasize that the goals of the institutions are focused on fostering social

utility.



Throughout this thesis the definition of the CBF, with the added component by Karman and Swachten

will be used. The reason for choosing that definition is that the definition is the most complete one.

The following main points are included in that definition: the forms of the institutions, the objectives,

public generosity and no reciprocal transfer.

The core activity of fundraising institutions is providing goods and/or services for social goals. Social

goals of fundraising institutions can be divided into four categories with subgroups (Website CBF):

Health: Public health, Disability care, Help for blind/visually handicapped/deaf people

International Aid: Development aid, Refugee aid and Aid to victims

Nature and Environment: Animal interests, Environmental, Conservation of the nature

Well-being: Civil & social goals, Human rights, Arts & culture, Sports & recreation,

Education & research and Church & religion.

To get an indication of the size of fundraising sector and the different categories in the Netherlands,

the following figures are added in this thesis. Figure 2.1 shows the total income over 2006 till 2010 per

category. The category international aid is the largest one with approximately 1.200.000.000 euro

income per year. The smallest is the health category, they received an income of approximately

500.000.000 euro per year. In figure 2.1 is an histogram of the total amount spent on objectives per

subgroup over 2006 till 2010. The category international aid spent the most of the four categories,

namely approximately 1.200.000.000 euro per year.

Figure 2.1 – Total income for each sector over 2006 till 2010.

Source: website CBF



Figure 2.2 – Total spending on goals for each sector over 2006 till 2010.

Source: website CBF.

2.3 The Central Bureau Fundraising

The CBF is an independent foundation which has been monitoring fundraising by fundraising

institutions since 1925. 831 institutions are registered at the CBF. The following tasks of the CBF can

be distinguished: conducting assessments for the CBF-seal (In Dutch: CBF-Keur) and the CBF-

Certificate for small fundraising institutions (In Dutch: CBF-Certificaat voor kleine goede doelen),

monitoring of responsible fundraising and spending and providing information and advice.

An accreditation system is designed to promote trustworthy fundraising and expenditure by reviewing

fundraising institutions and giving information and advice to government institutions and the public. A

tool used by CBF is a seal, which can be awarded if a fundraising institution exists for at least three

years, has a total income of 500.000 euro or higher and complies with the criteria set by the CBF

(CBF, 2011). The criteria for the seal are related to the following subjects: management, policy,

fundraising, education & communication, spending of funds and accountability. An important criterion

is that the costs for fundraising of the institution, expressed as a percentage of the revenues from its

own fundraising in any year, may not amount more than 25% of the revenues from its own

fundraising. Furthermore, the board must consist of independent members. In addition, for a clear

insight into the financial records every financial report must be drawn up according to the same

principles (www.cbf.nl). Compliance to the Dutch Accounting Standards for fundraising institutions

(RJ Richtlijn 650) is an important requirement for obtaining and keeping the CBF-seal.

CBF also awarded the CBF-Certificate for small charities and CBF-Certificate of no objection (In

Dutch: Verklaring van geen bezwaar). The CBF-Certificate for small charities is for fundraising



institutions that act in the fundraising sector for more than three years, but have a total income of less

than 500.000 euro. The criteria consist of the following subjects: management, policy, fundraising and

reporting. Compliance with RJ 650 is also a requirement the award and keep the certificate (CBF,

2011). The CBF-Certificate of no objection is for new fundraising institutions in the Netherlands

which act in the sector for less than three years, irrespective to their income. The criteria for this

certificate are the same as for the CBF-seal; however they are not as extensive as the criteria for the

CBF-seal (CBF, 2011).

When a fundraising institution has a CBF-Seal or CBF-Certificate of no objection, the public can trust

that the institution has been reviewed on management, policy, spending, fundraising and reporting.

(CBF, 2011). Because participation in the system is voluntary, accredited philanthropic institutions

stand out as more trustworthy to the public than non-accredited institutions. Accreditation gives

fundraising institutions the right to use an accreditation seal to signal their trustworthiness to the

public. From the perspective of donors, relying on the accreditation seal can be viewed theoretically as

a strategy to cut down on the transaction costs of a donation: instead of deciding on the accountability

of the charity themselves, donors take the seal as a signal of trustworthiness (Bekkers, 2003).

2.4 The Association of Fundraising Institutions

The Association of Fundraising Institutions (In Dutch: Vereniging Fondsenwervende Instellingen),

(hereafter: VFI) is an association for the fundraising sector, founded in 1994, with more than 120

members. Fundraising institutions can become member if they raise funds and are located in the

Netherlands, and have a CBF-Seal or a CBF-Certificate of no objection. The main tasks of VFI are

promoting the interests of charities, self-regulation, and providing services to charities. The goal of

providing services is to increase professionalism and efficiency in the sector. Moreover, the VFI works

closely together with the government to improve transparency of the social contribution of charities

and to increase public trust.

VFI drafted a code during the summer of 2004 named, the code for good governance for charities (In

Dutch: Code goed bestuur goede doelen. The reason for designing the code was improving the

transparency of the institution and reducing the vulnerability of fundraising institutions. The code must

be applied by members of the VFI. The members may diverge from individual principles in the code,

but must motivate their decision to do so. This is possible according to the VFI because it says that

final responsibility lies with the supervisory board (Website VFI).



2.5 Dutch Accounting Standards for Fundraising Institutions (RJ 650)

Section 9, Book 2 of the Dutch Civil Code (In Dutch:Titel 9 Burgerlijk wetboek) consists of directives

for annual reporting. Fundraising institutions are mostly associations or foundations, therefore Section

9 of the Dutch Civil Code is not applicable for them, only large foundations and associations have to

apply with Section 9, Book 2 of the Netherlands Civil Code, as a consequence of Section 2:360 (3)

BW (RJ 650. 101).

The Dutch Accounting Standard Board (In Dutch: Raad voor de Jaarverslaggeving) was founded in

1981 and has the objective to foster quality in external reporting of non listed companies in the

Netherlands. The RJ is responsible for preparing and publishing of directives (In Dutch: Richtlijnen),

and giving advice to the government and other stakeholders. The Dutch Accounting Standards Board

has designed special standards for fundraising institutions, namely RJ 650 ’Verslaggeving

fondsenwervende instellingen, to address the public’s desire to be informed about the extent to which

fundraising institutions fulfil their missions. Consequently, the Dutch Accounting Standards Board

asks charities to publish a transparent overview of their fundraising income and activity services (RJ

650.102).

With respect to fundraising institutions information requirements of users of financial reporting are

related to the understanding of the following items (RJ 650.104):

objective, strategy and policy of the institution;

the design and functioning of the institution, administration and supervision;

communication with donors, volunteers and other stakeholders;

whether or not achieving the objectives and performance;

financial management and accountability, and;

the plans for the future.

The guidelines of Richtlijn 650 Fondsenwervende instellingen describes that the financial reporting

should at least consist of the annual report, the financial statements (consisting of the balance sheet,

the statement of income and expenditures and the notes) and other information. The income of

fundraising institutions is dependent on different sources. See Appendix A for a standard model of the

balance sheet and profit and loss statement, which is given in RJ 650. It is recommended to also report

a cash flow statement (RJ650.103). The annual report should contain information about five

components (RJ650.202):

General information about the fundraising institution;

Information about the activities and the financial position;

Information about the board of directors, the committee and the supervisory board;



The report of the supervisory board (if there is a supervisory board) and;

A paragraph about the future (specification and explanation of expected future income and

expenses).

Four other important facts that have to be mentioned in the annual report are: description of job

operating procedures, policy of executive compensation and the practices of the policy in the financial

year, the procedure for hiring new executives or members of the supervisory board and their contract

time, and other relevant work positions (RJ 650.208).

Although compliance with RJ 650 is not required by law it is increasingly applied, because fundraising

institutions are recognizing the need of reliable and transparent financial reports. In addition,

compliance with RJ 650 is one of requirements to receive a CBF-seal or the CBF Certificate of no

objection.

2.6 Stakeholders of Fundraising Institutions

Herremans, Mentink, Hartman and Hoogendoorn (1993); Aukes (1997) distinguish the following

stakeholders of fundraising institutions:

Donors

Subsidizers

Board of directors

Management

Public (donors, volunteers)

Members

Government

Consumer organizations

Creditors

Lenders

Fundraising institutions have different stakeholders compared to profit-institutions; they have no

shareholders and are largely dependent on donations of the government and public. The main objective

of non-profit institutions is not making profit but is mainly focused on fostering social utility.

In the case of the annual reports of fundraising institutions, users of the financial reports are primarily

interested in which part of the benefit is spent to the charity (RJ 650.105). Based on these information

needs, the Dutch Accounting Standard Boards, as described in the previous paragraph, sets guidelines

for the financial reporting of fundraising institutions.



Chapter 3 – Earnings management

3.1 Introduction

The purpose of this chapter is to set out some theoretical background on earnings management. The

following sub question will be answered: What is earnings management, what are incentives to

engage in earnings management for managers and how can earnings be managed?

At first, the concept of information asymmetry (at fundraising institutions) will be described and

Positive Accounting Theory will be explained. Furthermore, it will introduce the phenomenon

earnings management and incentives to engage in earnings management. Subsequently, earnings

management through accruals and real variables will be highlighted.

3.2 Information Asymmetry at Fundraising Institutions

Information asymmetry means that one party has an information advantage over another party. Due to

information asymmetry management of fundraising institutions has an information advantage over

important stakeholders (e.g. donors and government). An effect of information asymmetry is that

managers of fundraising institution can manage earnings, because stakeholders have little information

to assess whether the financial statements are reliable. Two types of information asymmetry could be

distinguished according to Scott (2009): adverse selection and moral hazard. The two types of

information asymmetry will be shortly pointed out based on the definitions given by Scott (2009).

Adverse selection is a type of information asymmetry whereby one or more parties to a business

transaction, or potential transaction, have an information advantage over other parties (Scott, 2009,

p.13). The management of a fundraising institution has more information about the future situation of

the institution and the financial statements than the stakeholders. The stakeholders are not certain

whether the financial statements represent the real situation of the institution. They could only

determine the reliability of the financial statements on available outside information.

Moral hazard is a type of information asymmetry whereby one or more parties to a business

transaction, or potential transaction, can observe their actions in fulfilment of the transactions but

other parties cannot (Scott, 2009, p.14). The moral hazard problem is approached by Scott (2009)

from a situation where ownership and control are separated. However, despite there is no separation of

ownership and control in the fundraising institutions, because there are no shareholders, a moral

hazard problem exists. A distinction could be made between the management and the stakeholders

(e.g. donors, government, society) of the institution. Moral hazard problems can arise because



stakeholders are not able to monitor the performance of managers continuously. Due to that, managers

could act in their own interest and not in the best interest of the stakeholders.

3.3 Positive Accounting Theory

Accounting research theory can be divided into two main parts: normative and positive. Normative

theories attempt to tell individuals or constituencies what they should do. Positive accounting theory

(hereafter: PAT) is concerned with predicting such actions as the choices of accounting policies by

firm managers and how managers will respond to proposed new accounting standards (Scott, 2009).

The predictions made by PAT are organised around three hypotheses, which are formulated by Watts

and Zimmerman (1986). The three hypotheses will be shortly mentioned.

The bonus plan Hypothesis

Given that all other things being equal, managers of firms with bonus plans are more likely to choose

accounting policies that shift reported earnings from future periods to the current period. Managers

like a high remuneration, so if their remuneration (partly) depends on a bonus related to reported net

income, then they may be able to increase their current bonus by reporting the highest possible

income. One way to do that is to choose accounting policies that increase current period earnings.

The debt covenant hypothesis

All other things equal, the closer a firm is to violation of accounting-based debt covenants, the more

likely that firm manager is to select accounting procedures that shift reported earnings from future

periods to the current period. The reason is that increasing reported net income will reduce the

probability of technical default. Most debt agreements contain covenants that the borrower has to meet

during the agreement term. If the covenants are violated the debt covenant may impose penalties. To

prevent or postpone such violation the management may adopt accounting policies to raise current

earnings. According to the debt covenant hypothesis the management is more likely to do this if the

firm approaches default or is actually in default.

The political cost hypothesis

All other things being equal, the greater the political costs faced by a firm, the more likely the manager

is to choose accounting procedures that defer reported earnings from current to future periods. The

political cost hypothesis introduces a political dimension into accounting policy choice. For example,

political costs can be imposed by high profitability which may attract media attention and consumer

attention. Such attention can result in political heat on the firm and politicians may respond with new

regulations.



3.4 Defining Earnings Management

In the literature several definitions of earnings managements are used. Healy and Wahlen (1999) give

the following definition:

‘Earnings management occurs when managers use judgment in financial reporting and in

structuring transactions to alter financial reports either to mislead some stakeholders about the

underlying economic performance of the company or to influence contractual outcomes that depend

on reported accounting numbers.’

However, Vander Blauwhede (2003) argued that earnings management can also be used by managers

to communicate inside information related to the future performance of the institution to the public.

Scott (2009) formulated earnings management more negatively:

‘Earnings management is the choice by a manager of accounting policies as at to achieve

some specific objective’

The objectives to engage in earnings management are not clear in the definition of Scott. Schipper

(1989) formulated these objectives in his definition:

‘Earnings management is disclosure management in the sense of a purposeful intervention in

the external financial reporting process, with the extent of obtaining some private gain, as opposed to

merely facilitating the neutral operation of the process.’

A more negative definition of earnings management stated that stakeholders are misled and a more

neutral definition does not directly assume misleading stakeholders. In both types of definitions

earnings management occurs due to an incomplete and imperfect market. Managers aim to reach

certain goals by structuring accruals and make certain decisions to manipulate surpluses and cost

allocations.

A minor extension to the definition would encompass real earnings management, accomplished by

timing investments or financing decisions to alter reported earnings or some subset of it (Bissessur,

2008). The definition of Roychowdhury (2006) is frequently used in empirical studies of earnings

management. He define real earnings management as:

‘Real activities manipulation is defined as departures from normal operational practices,

motivated by managers’ desire to mislead at least some stakeholders into believing certain financial

reporting goals have been met in the normal course of operations.’



Within the framework of this thesis the following definition of earnings management, which is based

on Scott’s definition, will be used:

‘Earnings management is the choice by a manager of accounting policies, or actions affecting

earnings, so as to achieve some specific objective’

Earnings management and earnings quality are closely related. Beaver (2002) suggests that earnings

management can improve or impair the quality of earnings through the exercise of discretion over

accounting numbers. Discretionary behaviour includes voluntary earnings forecasting, voluntary

disclosure, choice of accounting methods, and estimation of accruals.

Watts and Zimmerman (1986) distinguishes four different strategies for earnings management

intended by managers based on the positive accounting theory of Scott. The strategies are:

Big Bath Accounting. When institutions could not prevent reporting loss, they rather report a

large loss since they have nothing to lose at this point.

Income minimization. Earnings are managed downward to minimize profit.

Income maximization. Earnings are managed upward to maximize the profit level.

Income smoothing. Earnings are managed in order or provide a stable flow of earnings without

large increases or decreases.

3.5 Incentives to Engage in Earnings Management

Positive Accounting Theory, which is described in paragraph 3, has generated a large amount of

empirical research. Much of this research has been done related to the implications of the three

hypotheses. Healy and Wahlen (1999) structured the reasons why managers engage in earnings

management into three incentives for earnings management: capital market expectations and

valuation, contract written in terms of accounting numbers and anti-trust or other government

regulation.

Contract written in terms of accounting numbers

The contracting motives are largely based on PAT. An institution can be seen as a group of different

contracts: the firm has contracts with employees, lenders, management and suppliers. Contracts are

used as a solution of the agency problem to align interests between managers and stakeholders

(compensation contracts) and managers and lenders (lending contracts). One of the objectives of the

institution is to minimize the various contracting costs. In this theory accounting data is used to

monitor and regulate the contractual regulations between management and different stakeholders.



Capital market expectations and valuation

Investors and analysts value stocks by discounting future cash flows of firms. Accounting information,

including financial statements and quarterly figures, is used to determine the stock price. This creates

an incentive for management to manipulate earnings, when trying to influence the short-time stock

price performance. The incentives in this group are related to management buyouts, initial public

offers, meeting or exceeding financial analysts’ forecasts and type of investors and research and

development expenditures.

Anti-trust or other government regulation

Another incentive, which is based on the political cost hypothesis, involves the phenomenon of the

social relevance of firms and that these firms can be subject of the political agenda. Institutions may

have an interest to influence the results in order to be more or less visible in politics and media.

3.6 Earnings Management through Accruals

There are many ways to apply earnings management. Earnings can be management by manipulation of

accruals with no direct cash flow consequences. This paragraph will have a look at this method.

Accruals arise when an institution records revenue or expense on its books prior to (or after) the

related cash flow occurs (Scott, 2009). According to Ball and Shivakumar (2005) there is sufficient

flexibility in the application of accounting standards to allow the supply of financial reporting quality

to respond to demand. It is well known that accruals present flexibility in financial reporting, because

accruals by definition are not observable cash outcomes at the time of reporting and require estimates

of future cash outcomes. However, estimation errors and their subsequent corrections are noise that

reduces the beneficial role of accruals. Accruals consist of two components: non-discretionary accruals

and discretionary accruals. The discretionary accruals identify management choices and the non-

discretionary part reflects business conditions. Accruals can be of poor quality for two reasons; (1)

management intentionally bias accruals through earnings management and (2) unintentional errors in

accrual estimation could occur because it is difficult to predict an uncertain future, or because there are

insufficient controls in place to catch errors (Doyle and Ge, 2007).

Discretionary accruals allow managers to exercise their discretion over accounting choices and

estimates, and the literature documents that firms use discretionary accruals to practice earnings

management (e.g. Jones, 1991; Healy, 1985; Dechow, Sloan and Sweeney, 1995). The accrual-based

method requires a separation of accruals into discretionary and non-discretionary components in order

to use the discretionary accruals as a proxy for earnings management. One major limitation of this

method is the difficulty of identifying and separating total accruals into its unmanaged and managed

components.



One can distinguish several accrual models to measure earnings management; Healy model (1985),

DeAngelo model (1986); Jones model (1991); Modified Jones model (Dechow et al., 1995). Healy

(1985) and DeAngelo (1986) were the first to use total accruals and the change in total accruals,

respectively, as measures of managers’ discretion over earnings (McNichols 2000). Jones (1991)

introduced a regression approach to control for non-discretionary factors influencing accruals,

specifying a linear relation between total accruals and change in sales and property, plant and

equipment. These approaches are typically called aggregate accruals studies. The change-in-accruals

measures (Healy model and DeAngelo model) assume that the unified determinants of un-manipulated

accruals are constant over time. In contrast, the direct estimation (Jones model) identifies accounting

fundamentals as the determinates of unmanipulated earnings (Schipper and Vincent, 2003).

This thesis will be focussed on the (Modified) Jones model; the models will be used in the empirical

research; the reason for that choice will be explained in the empirical part of this thesis.

Jones model (1991)

Jones (1991) investigated whether institutions that benefit from import relief tend to minimize their

surplus during import relief investigations among these institutions by the United States International

Trade Commission (ITC). A smaller surplus increases the chance that measures will be taken that are

positive for the institution, as the ITC will protect the institution with respect to foreign competitors.

Regulatory and political motives are reasons for institutions to manage their earnings.

The Jones model describes the effect of changes in firm’s economic circumstances on non-

discretionary accruals. The simplest and most frequently used way to calculate these accruals is taking

the difference between operational cash flows and net income. However, Jones defines accruals as: (Δ

current assets – Δ cash) + (Δ current liabilities – Δ current maturities of long term debt) – Δ income

taxes payable – depreciation and amortization expenses. The total accruals must be split in a

discretionary and non-discretionary part. The following equitation is the Jones model (1991):

With:

= Total accruals in year t for institution i;

= Total assets for institution i in year t-1;

= Revenues for institution i in year t less revenues of institution i in year t-1;

= Property plant and equipment for institution i in year t and;

= residual term that captures all impacts on other than those from and

.



Ordinary least square regression is used to estimate the values of Total accruals are a

function of the change in revenue and the level of property, plant and equipment. To control for

changes in working capital accounts which are caused by changes in the level of business activity, the

change in revenue is included in the model. Property, plant and equipment is included in the model to

control for non-discretionary depreciation expenses. The variables are scaled by total assets for the

year t-1 to reduce heteroscedasticity. The error term in the regression shows to what extent earnings

are being managed: a positive error term shows motives for income maximizing and a negative error

term indicates income minimizing. The discretionary accruals are the part of the total accruals which

do not correlate with the change in the level of business activity. The regression residuals are

considered to be managed accruals, and can be defined as:

With:

=Level of discretionary accruals at time t for institution i.

One implicit assumption of the Jones (1991) model is that revenues are non-discretionary. The

explanatory power of the Jones model is low. An interpretation of the low explanatory power is that

managers have considerable discretion over the accrual process, which they use to mask financial

performance (Dechow, Ge and Schrand, 2010). Dechow et al. (1995) modify the Jones model to adjust

for growth in credit sales in an attempt to reduce Type II errors.

Modified Jones model (Dechow et al., 1995)

The modification of the Jones model is designed to eliminate the conjectured tendency of the Jones

model to measure discretionary accruals with error when discretion is exercised over revenues. The

only adjustment relative to the Jones model is that the change in revenues is adjusted for the change in

receivables in the event period. The modified Jones model implicitly assumes that all changes in credit

sales in the event period result from earnings management. This is based on the reasoning that it is

easier to manage earnings via exercising discretion over the recognition of revenue on credit sales than

it is to manage earnings via exercising discretion over the recognition of revenue on cash sales

(Dechow et al.,1995).

The modified Jones model assumes that the non-discretionary component of total accruals (NDA) is a

function of the change in revenues adjusted for the change in receivables and the level of property,

plant and equipment. The modified Jones model is:



With:

= Net receivables for institution i in year t less net receivables for institution i

in year t-1.

In the modified Jones model, discretionary accruals are estimated during the event period as:

Credit sales are frequently manipulated, so this modification increase the power of the Jones model to

yield a residual that is uncorrelated with expected revenue accruals and better reflects revenue

manipulation. However, the modified Jones model still suffers Type I errors, perhaps even more than

the original Jones model. Furthermore, the modified Jones model cannot be used to identify distortions

induced by long term accruals, which is an important limitation of the model. Impairments of PPE and

goodwill are likely to reflect earnings management or accounting distortions (Dechow et al., 2010).

It has to be noticed that some errors can exist in the accruals models: misclassification errors can

include Type I errors, which classify accruals as abnormal when they are a representation of

fundamental performance, and Type II errors, which classify accruals as normal when they are not

(Dechow et al., 2010). In the Jones model, sales is the key non-discretionary variable driving current

accruals, and capital expenditures is the key variable driving non-current accruals. Total accruals are

then regressed on only the non-discretionary accruals and it is assumed that the residual is

discretionary. Failure to identify fully the non-discretionary component implies the regression residual

contains both discretionary and non-discretionary components, leading the research to measure the

estimated discretionary and non-discretionary components with error. To interpret accruals-based tests

as evidence for earnings management, one must be confident that measurement error in the

discretionary accrual proxy is not correlated with an omitted variable in the estimation of the

discretionary accrual (Bissesseur, 2008 and Dechow et al., 2010).



3.7 Earnings Management through Real Variables

The previous paragraph was focused on earnings management through accruals. However, real

activities, which affect cash-flows and earnings can also be manipulated (Roychowdhury, 2006;

Vander Blauwhede, 2003). Real earnings management is achieved by changing the timing or

structuring of operations and transactions to alter reported earnings in a particular direction. Real

earnings management is achieved by changing the timing or structuring of operations and transactions

to alter reported earnings in a particular direction. Real transactions such as advertising, R&D are

strategically planned. The real activity must have two characteristics to affect accounting performance.

At first, it must be in an area where accounting performance-enhancing changes can be implemented

over the short term. Secondly, the impact on accounting performance must be essentially immediate

(Eldenburg et al., 2011).

The possibility of manipulating real activities by managers is discussed in prior literature, however

these studies are mainly related to the profit-sector. Most of the research is related to real earnings

management with R&D expenses (Baber, Fairfield and Haggard, 1991; Cheng, 2004). There are few

studies related to how mangers use specific transactions other than R&D expenses to influence

earnings. Some studies are focused on the sale of fixed assets (Herrmann, Tatsuo and Wayne, 2003;

Bartov, 1993), sales price reductions (Jackson and Wilcox, 2000), non-revenue generated expenditures

at non-profit institutions (Eldenburg et al., 2011), overproduction, managing sales, advertising and

SG&A expenses (Roychowdhury 2006). Results of these studies will be shortly mentioned.

Baber et al. (1991) investigated whether concern about reporting favorable trends in accounting net

income influences decisions to invest in R&D. They used data for 438 United States industrial

institutions during the years 1977-1987. Analysis indicated that relative R&D spending is significantly

less when spending jeopardizes the ability to report positive or increasing income in the current period.

Cheng (2004) provided evidence that compensation committees establish a greater positive association

between changes in R&D spending and changes in CEOs options in order to prevent opportunistic

reductions in R&D spending.

Herrmann et al, (2003) examined the usage of income from the sale of fixed assets and marketable

securities to manage earnings. They found a negative relation between income from asset sales and

management forecast error. When current reported operating income is below (above) management's

forecast of operating income, firms increase (decrease) earnings through the sale of fixed assets and

marketable securities. Bartov (1993) investigated whether managers manipulate earnings through the

timing of income recognition from disposal of assets and he showed that the profit from sales of assets

is negatively correlated with earnings changes. It is argued that institutions facing earnings declines

boost profits through increased asset sales.



Jackson and Wilcox (2000) examined whether managers grant sales price reductions in the fourth

quarter to accelerate customer purchases and, as a result, avoid losses and declines in earnings and

sales. Consistent with expectations, the results indicated that managers grant sales price reductions in

the fourth quarter to meet annual financial reporting targets.

Management of sales, reduction of discretionary expenses, overproduction are examined by

Roychowdhury (2006). He developed the empirical methods to detect real activities manipulation

other that reduction of R&D expenses. The results suggested that drawing inferences on earnings

management by analyzing only accruals may be inappropriate, because suspect firm-years manipulate

real activities to avoid reporting losses. Additionally, institutions appear to be managing real activities

to a greater extent if they have a higher proportion of current liabilities.

Eldenburg et al. (2011) investigated whether non-profit hospital managers change real activities to

manage net income toward a benchmark of zero. They used 191 Californian hospitals over the years

1997 – 2003. They found evidence that expenditures associated with non-operating and non-revenue-

generating activities are managed to achieve positive income and asset dispositions are managed to

avoid large positive net incomes.



Chapter 4 – Earnings Management at Non-Profit Institutions

4.1 Introduction

Research related to earnings management in the non-profit sector will be discussed in this chapter to

get an insight into the differences between non-profit and profit institutions and the reasons for

engaging in earnings management. Incentives for managers at fundraising institutions to engage in

earnings management will be described and the expectations related to earnings management by

managers of fundraising institutions will be discussed. Research related to the expectations of earnings

management at fundraising institutions will be based on research done at non-profit institutions

because literature focused on earnings management at fundraising institutions is scare. Research done

at fundraising institutions is mainly focused on managing ratios and not earnings itself (e.g. Krishnan

et al., 2006; Baber et al. 2001).

Sub-question 3 will be answered in this chapter; what are the motives for managers at non-profit

institutions and specifically fundraising institutions to engage in earnings management?

4.2 Research related to Earnings Management at Non-profit Institutions

Although earnings management research in non-profit institutions is relatively scarce in comparison to

for-profit institutions, a number of authors have documented its existence. Non-profit institutions

adjust accounting numbers for several reasons: improving their efficiency ratios (Jones & Roberts,

2006; Krishnan, Yetman & Yetman, 2006;), avoiding taxes (Hofmann, 2007; Omer & Yetman, 2003)

and avoiding small losses and high profits (Ballantine, Forker and Greenwood, 2007; Leone & Van

Horn, 2005).

Non-profit institutions have other incentives to engage in earnings management than for-profit

institutions. While for-profit institutions focus on meeting or beating external benchmarks to increase

stock price, these objectives are irrelevant for non-profit institutions (Eldenburg et al., 2011). The

priority of non-profit institutions consists in providing programs and services that are of public benefit.

The definition of non-profit does not imply that the institutions do not make any profit, but rather that

the residual profits of the institution need to be spent on the goal of the institution as stated in the

statutes of the foundation. The realization of profit is not the main purpose of non-profit institutions

(Deneffe and Masson, 2002).

Non-profit institutions have incentives to engage in earnings management related to the reduction of

cost of debt, ally creditor’s concerns and to maintain or increase the institution’s donation base (Leone

and Van Horn, 2005; Eldenburg et al., 2011). Leone and Van Horn (2005) examined the incentives of



CEOs in non-profit institutions to engage in earnings management. The research is done at non-profit

hospitals in the United States. Leone and Van Horn (2005) investigated the incentives to manage

earnings to a range just above zero. Managers of hospitals can adjust discretionary spending and

accounting accruals. They found that non-profit hospital managers adjust discretionary spending to

manage earnings. In addition, discretionary accruals are also used to meet earnings objectives.

Eldenburg et al. (2011) investigated whether non-profit hospital managers change real activities to

manage their net income toward a benchmark of zero. They found evidence that expenditures

associated with non-operating and non-generating activities are managed to achieve positive income

and management of asset dispositions to avoid large positive incomes. Ballantine et al. (2007)

investigated non-profit hospitals in England, which have the legal obligation to report financial

breakeven. They showed that earnings are managed via discretionary accruals such that this happens.

Leone and van Horn (2005) suggested that hospitals are expected to spent available resources to

pursue the objectives while remaining financially solvent. In contrast to the investor-owned setting

where earnings are used to evaluate managers’ ability to increase the value of the institution, managers

of non-profit institutions are evaluated on their ability to meet a non-value maximizing objective (e.g.

for fundraising institutions allocating raised money to goals and efficiency) subject to a zero-profit

constraint. Leone and Van Horn (2005) describe the intuition behind the zero-profit constraint. They

argue that non-profit institutions have a social objective and some amount of charity care to the

indigent. The institution is expected to spend the available resources to pursue its objectives while

remaining financially solvent.

There are costs associated with reporting losses and costs associated with reporting profits (Eldenburg

et al., 2011; Leone and Van Horn, 2005). Leone and Van Horn (2005) and Ballantine et al. (2007)

suggested that profitability serves as a measure of the CEO’s ability to sustain the hospital as a going

concern. Reporting any loss suggests that the hospital CEO violated the zero profit constrain, which

will increase the likelihood that a CEO is terminated. If the compensation or job security of managers

depends on achievement of (internal) objectives, managers will manage earnings in order to report

small profits. Furthermore, Leone and van Horn (2005) suggested that managers in non-profit

hospitals manage earnings to reduce the cost of debt. Cost of debt can be reduced by decreasing the

variance of earnings. Since hospitals have a constraint of earnings zero long run profit, hospital CEOs

have an incentive to manage earnings toward zero to minimize the earnings variance. By reducing the

cost of debt through earnings management, managers can use the saved cost to increase the quality of

services the hospitals provides or to increase their own perquisites.

When hospital’s report excessive profits, it is argued that the philanthropic activities are exhausted,

there is a delay in these activities until a future period or there is not sufficient effort extended to

identify additional philanthropic projects. Frank, Salkever and Mitchell (1990) reported a negative



correlation between reported income and the level of donations. This indicates that donors take

reported earnings into account when they decide to give donations and that they are less willing to

donate money to profitable institutions. Donors are less likely to donate to institutions that report high

profits, because donors do not view that the institution need charity. Furthermore, donors may view

the presence of profits in the institution as evidence that the philanthropic goal has either been met or

is not being pursued appropriately by the institution (Frank et al., 1990). Eldenburg et al. (2011)

suggested that hospital mangers want to reduce scrutiny by lowering income. In addition, they argued

that high profits may alienate donors and conflict with the mission of a non-profit institution.

Earnings are managed towards zero or a small profit by managers of non-profit institutions, because

managers will decrease the likelihood of termination, reduction of cost of debt, increase or maintain

the donation base and the scrutiny will be reduced.

4.3 Incentives to Engage in Earnings Management at Fundraising Institutions

In the next paragraphs the focus will be on fundraising institutions. The incentives for managers to

engage in earnings management will be described and the expectations related to earnings

management at Dutch fundraising institutions will be set out.

As mentioned before, Healy and Wahlen (1999) have structured the reasons for engaging in earnings

management into three incentives. One has to be notified that the research related to incentives to

engage in earnings management is mainly done in the United States. Dutch government regulation is

different compared to the United States regulation. The three incentives will be described for

fundraising institutions.

Dutch fundraising institutions do not have a lot of debt on their balance sheet. The short term debt on

their balance sheet is mainly related to project obligations of fundraising institutions. Long term debt

does not exist at the most Dutch fundraising institutions. For that reason the empirical study will not

be focused on earnings management in order to reduce the probability of covenant violation in debt

contracts. Moreover, it is uncommon that bonuses are used for earnings management purposes at

fundraising institutions. The compensation of managers at Dutch fundraising institutions is in the most

cases not dependent on a performance-based measure. Furthermore, fundraising institutions are

usually foundations or associations. For that reason they do not offer shares to the public are not

owned by investors. The incentives tied to shares are of no consequence to managers at fundraising

institutions and are not applicable to fundraising institutions.

The anti-trust or other government regulation is an important incentive for managers of fundraising

institutions to engage in earnings management. Fundraising institutions are visible for the society; they



are subject of the public debate and are discussed in the by politicians. High profitability can lead to

discussions at the Parliament which can lead to new regulations. Based on the assumption that

fundraising institutions want to minimize the political costs they face, it is expected that fundraising

institutions strive towards zero or a small positive result. The different incentives to manage earnings

at non-profit institutions are presented in table 4.1.

Table 4.1 – Reporting Incentives by Non-Profit Institutions.

Costs to report losses Costs to report profits

Debt costs are higher Cost related to regulation

Reputation costs for the CEO Less donations from the public

Less donations from the government

Based on Leone and Van Horn; Eldenburg et al., 2011; Ballantine et al. (2007)

4.4 Expectations of Earnings Management at Non-Profit Institutions

In the previous paragraph research related to earnings management at non-profit institutions in the

United States is described. Based on literature described in the previous paragraph the expectations

related to earnings management at fundraising institutions will be described.

Fundraising institutions do not strive towards profit maximization but they have social duties. They do

not have to maximize incoming cash flows in order to make outgoing cash flows possible; they receive

funds. Leone and Van Horn (2005), Ballantine et al. (2007) and Eldenburg et al. (2011) argued that

managers of non-profit firms try to work to an outcome close to zero or a small positive result. These

studies are done for other non-profit institutions (e.g. hospitals). Some incentives described in the

previous paragraphs are less strong (the reduction of the cost of debt) in the Netherlands, while others

are important drivers to engage in earnings management (e.g. incentives related to the donation base).

The expectation is that fundraising institutions manage their result towards zero or a small positive

result. Since fundraising institutions are income-spending entities, they do not try to be very profitable.

Donors consider the profitability of a hospital when making donation decisions (Frank et al., 1990).

Donations are important for fundraising institutions, without donations objectives cannot be

accomplished. Managers of fundraising institutions will try to spend their budget in order to show that

the policy of the institution is effective and efficient and in order to maintain or increase their donation

base. Reporting a zero or small result indicates that all resources are used to make the fundraising

institution’s goals possible. All resources acquired, due to gifts from the public and government, were

required to enable the execution on the policy of the institution. Managers want to show that in the

future the fundraising intuition needs these funds at least to execute the policy that was developed.

Managers will manage the earnings towards zero in order to maintain or increase their donation base.



As mentioned before, fundraising institutions are visible for the society. The media is interested in the

institutions and they can bring institutions in public debates. High profitability can lead to political

heat and new regulations. Based on the assumption that institutions want to minimize the political

costs, it is expected that fundraising institutions strive towards zero or a small positive result. In

addition, managers of fundraising institutions will not show large losses because that can indicate that

they are not capable to manage the institution. Profitability is used as a measure of a CEO’s ability to

sustain the institution as a going concern. To reduce the likelihood that a manager is terminated, the

managers will manage the earnings towards a small positive result.

Reporting losses can lead to reputation damage of the CEO of the institution. However, reporting large

profits by fundraising institutions may lead to:

Receiving less funds from the government in the future;

Receiving less funds from the public and other donors in the future;

Discussions in at the Parliament (political heat), which can lead to new regulations;

Discussions in the media.

In conclusion, it is expected that mangers of fundraising institutions manage earnings to report profits

that are close to zero and nonnegative. Managers with small losses will manage earnings upwards so

that earnings are not negative to avoid violating zero profit constraint.

Managers of fundraising institutions can exploit the agency problem by managing. When profits are

far above (or below) a small positive result or zero, managers can make income-decreasing (income-

increasing) accruals so that the income is close to zero or a small positive result. Due to such actions

of the management, donors and other stakeholders cannot make good decisions based on the result of

the fundraising institution.

Managing earnings could also be accomplished by increasing or decreasing some types of

expenditures, but only if income is potentially high. Managers of fundraising institutions can have an

influence on the expenses for the institution. They can increase (decrease) fundraising expenses and/or

management & administration expenses in order to reduce (increase) the result. If earnings are high

(low), managers can increase (decrease) management & administration expenses and/or fundraising

expenses during the year in order to come close to a small positive result or zero.

Another possibility to influence earnings in order to come close to the result is managing the subsidy

obligations. A lot of subsidy obligations are concerned for several years. There is a subsidy obligation

if the board made a decision and if this decision is indicated in writing to the subsidy recipient; hereby

a legal or constructive obligation arises. This obligation should be included as debt on the balance

sheet (RJ 650.326). If a subsidy obligation is done, the fundraising institution added this obligation to



the costs (expenses) in the profit and loss statement under the account spending to objectives.

Managers of a fundraising institution can influence these accounts in order to reduce (increase) their

reported result. If the result deviates much from a small positive result or zero, they can decide to

subsidize a project, as an effect the expense on the profit and loss statement increases and the surplus

of the institution will be lower. So, besides managing management & administration and fundraising

expenses, managers of fundraising institutions can also manage the spending on objectives which is a

part of the expenses of an institution.

The hypotheses related to the use of earnings management via accruals and real variables (expenses) at

fundraising institutions will be composed in chapter 6.



Chapter 5 – Corporate governance at Fundraising Institutions

5.1 Introduction

In this chapter the focus will be on why corporate governance is needed at non-profit institutions. In

addition, corporate governance structures at Dutch fundraising institutions are described. This is

needed in order to understand the different governance structures at fundraising institutions and to set

the hypotheses in the next chapter. After reading this chapter sub-question 4 is answered; why is

corporate governance needed at non-profit institutions and how is corporate governance organized at

Dutch fundraising institutions?

5.2 Corporate Governance at Non-profit Institutions

The concept of corporate governance stems from principal-agent theory, which focuses on issues of

responsibilities (Fama and Jensen, 1983). To align the interests of shareholders and managers when

ownership is separated from control in an institution is the main rationale for creating strong

governance structures. Fama and Jensen (1983) argue that the non-profit form serves to mitigate

potential principal-agent problems between donors and residual claimants. In non-profit institutions

there are no explicit residual claimants, which reduce the incentives to expropriate cash-flows from

received donors. However, the lack of residual claimants does not eliminate agency problems in non-

profit institutions between donors and internal agents. Non-profit institutions suffer agency problems

that are similar to for-profit institutions (Krishnan, Yetman and Yetman, 2006). Krishnan et al. (2006)

argued that accounting information can assist donors and other stakeholders in monitoring their

implicit contracts by providing a means for donors to evaluate whether the non-profit institution is

using its donations in the most efficient and effective manner. Donors use accounting measures to

monitor the efficiency of non-profit institutions to ensure stewardship of their donated resources and to

assist them in making their donation allocation decisions (Baber et al. 2001; Krishnan et al., 2006;

Krishnan and Yetman, 2011).

O’Regan and Oster (2005) suggested that governance mechanisms should ensure the mission of the

non-profit institution is preserved and that the constituents are protected. So, also non-profit

institutions (like fundraising institutions) need various governance mechanisms to serve control or

monitoring purpose in order to give stakeholder an accounting measure for making decisions.

Improper financial accounting practices are assumed to obscure real performance and diminish

investors’ ability to make informed decisions (Xie et al., 2003). On behalf of donors and other

stakeholders, the supervisory board has a fiduciary duty to ensure that financial statements are free

from misreporting (O’Regan and Oster, 2005). Agency theory emphasizes that the board is in place to



monitor management. The agency view of an audit committee requires the committee to reduce

agency costs by monitoring financial reporting quality (Dhaliwal, Naiker and Navissi, 2010). The

supervisory board and audit committee are needed to monitor financial reporting quality and thereby

earnings management of an institution.

Yetman and Yetman (2011) investigated the effects of corporate governance on financial reporting

quality at non-profit institutions. Various stakeholders use non-profit financial information for

donating, contracting and regulating decisions, and these decisions can be affected by the quality of

the underlying financial information. Inaccurate reports can lead to suboptimal decisions and potential

misallocation of resources. Their findings suggest that attempts to enhance the monitoring and

oversight of non-profits can lead to higher quality financial reports, particularly if those efforts involve

market participants such as lenders or donors.

So, stakeholders at fundraising institutions need to know the earnings in order to make decisions (e.g.

whether or not give a donation at the fundraising institutions. Improper financial accounting practices

diminish stakeholders of non-profit-institutions to make informed decisions. The supervisory board

and audit committee can reduce information asymmetry between the insiders and the outsiders by

monitoring the financial reports of the institutions.

5.3 Governance Structures at Dutch Fundraising Institutions

There are different governance models in the Netherlands, United States and United Kingdom, so for

that reason a clear definition for each function is necessary to understand the research and conclusions

of prior literature discussed in this chapter.

Several models related to the structure of a fundraising institution can be distinguished; therefore it is

important who is seen as the supervisory board, as the governing board and the board of directors for

setting the hypotheses. In practice there is a so-called board-model (In Dutch: Bestuursmodel) and the

oversight-model (In Dutch: Raad van Toezichtmodel). A graphical representation is added in this

thesis to get an understanding of the different models (table 5,1 on the next page). The translation of

the functions is presented in appendix B.

As said in chapter 2, fundraising institutions are mostly associations or foundations. At associations

there is a general assembly meeting (hereafter: GAM). The GAM has several legal responsibilities

pertaining to the appointing and discharging management, establishing the annual report, and

approving amendments to the articles of association. The boards or oversight boards always have to

give responsibility to the GAM.



Figure 5.1 – Governance Structures of Dutch Fundraising Institutions.

Source: Code goed bestuur voor goede doelen

At the oversight- model (model IV in previous figure), the management function is usually filled by

statutory directors, but it can also be done by the governing board. The task of the oversight board is to

supervise (the policy of) the board of directors and operations in general and advice the board of

directors. This body is not allowed to receive compensation, but only a reimbursement of expenses.

In the board model legal management is carried out by the board. In model III, the board has an

oversight function and has delegated most of his tasks to management. Although the board performs

an oversight function, the main difference with model IV is that the board is still legally responsible.

In models I and II the board is more closely involved with operational tasks.

Within the financial institution, a clear distinction should exist between the supervisory role and the

managerial role or the executive role. The governing board determines policy, establishes the financial

guidelines and holds the final responsibility for the daily management. The supervisory board adopts

or approves plans and critically monitors the institution and its results. They monitor the governing

board (Seal Regulations CBF Seal of Approval, 2010).

Prior research has found that the existence of an audit committee and the composition of the audit

committees and the supervisory board have an impact on earnings management (e.g. Klein, 2002; Xie

et al., 2003; O’regan and Oster, 2005; Vafeas, 2005; Felo, Krishnamurthy and Solieri, 2003; Beaver,

2002). In the following chapter some characteristics of the supervisory board and the audit committee

will be discussed which will have a relationship with earnings management of fundraising institutions.



Chapter 6 – Hypotheses Development

6.1 Introduction

In this chapter hypotheses will be formulated with respect to earnings management at Dutch

fundraising institutions. Subsequently, hypotheses related to characteristics of the supervisory board &

audit committee and the relationship with earnings management will be composed. In order to get an

clear overview of the discussed literature on which the hypotheses in this paragraph are based, an

overview of the discussed literature is added in Appendix C.

The research discussed in this paragraph is mostly related to the impact of corporate governance

aspects and earnings management at profit-institutions. However, research is mostly conducted at for-

profit institutions and there is a very small base of literature on earnings management at non-profit

institutions and the impact of supervisory board &audit committee characteristics. The there are no

reasons beforehand why characteristics of the supervisory board & the audit committee have another

impact on earnings management at non-profit institutions. For that reason the hypotheses in this

paragraph are based on for-profit literature.

Sub question 5 will be answered in this chapter; what are the conclusions of prior research concerning

the supervisory board and the audit committee characteristics and their relation with earnings

management.

6.2 Earnings Management at Dutch Fundraising Institutions

As described in chapter 4, managers of fundraising institutions will manage their result towards zero

or a small positive result. Ballantine et al. (2007) and Leone and Van Horn (2005) found that reported

income by hospitals in the Netherlands and United States is discontinuous around zero. The approach

used by Ballantine et. al (2007) and Leone and Van Horn (2005) was derived from the study

performed by Burgstahler and Dichev (1997). The expectation is that if managers manage earnings to

avoid small losses, a discontinuity of income with unusually low frequencies in the interval just to the

left of zero will be observed. The following hypothesis is composed:

Hypothesis 1: Small losses are managed upward to small profits.

As mentioned before, earnings can be managed by discretionary accruals or abnormal expenses. A

relationship between group and the direction of the discretionary accruals is expected. In addition, a

relation is predicted between groups and the direction of abnormal expenses (management &

administration, fundraising and spending on objectives). For example: managers who have negative

earnings will use positive discretionary accruals and/or negative abnormal expenses to come close to



zero or a small positive result. The reverse situation is the case for managers who have a high positive

result: they will use negative discretionary accruals and/or positive abnormal expenses. The following

hypotheses will be tested:

Hypothesis 2: Negative (Positive) discretionary accruals occur more (less) often at some earnings

groups.

Hypothesis 3: Negative (Positive) abnormal management & administration expenses are more

(less) often used at some earnings groups.

Hypothesis 4: Negative (Positive) abnormal fundraising expenses are more (less) often used at

some earnings groups.

Hypothesis 5: Negative (Positive) abnormal spending on objectives are more (less) often used at

some earnings groups.

6.3 Characteristics of the Supervisory Board & the Audit Committee on Earnings Management

In this paragraph the hypothesis related to earnings management and characteristics of the supervisory

board and audit committee will be composed.

6.3.1 Size of the Supervisory Board and the Existence of an Audit Committee

The size of the supervisory board and the impact on earnings management is a much discussed

characteristic in the literature (e.g. Xie et al. 2003; Yang and Krishnan, 2005; Rahman and Ali, 2006;

Jouber and Fakhfakh, 2010). There is no consensus in the literature about the direction of the

relationship between the size and earnings management. Ex ante, adding more directors to a

committee is likely to have a non-linear effect on committee performance. Initially adding more

members to the committee enhances performance because there are more people on whom to drawn

(Vafeas, 2005) and facilitate quality discussions among audit committee members (DeZoort and

Salterio, 2001). Rahman and Ali (2006) argued that large boards with varied expertise could increase

the synergetic monitoring of the board in reducing the incidence of earnings management. However,

when the committee is too large, performance declines because of process losses and diffusion of

responsibilities (Vafeas, 2005).

Lin, Li and Yang (2006) examined the association between the characteristics of audit committees

(size, independence, financial expertise, and activity and stock ownership) and earnings restatements,

which is a direct measure of earnings management. They investigated 267 publicly-held corporations



in the United States that restated their reported earnings for the fiscal year 2000 and found a negative

association between the size of the audit committee and occurrence of earnings restatements. Their

results show that larger audit committees may provide more oversight over the financial reporting

process. Earnings quality seems to improve due to such oversight by reducing the probability of

restating financial statements.

Xie et al. (2003) investigated the role of the board of directors and the audit committee in preventing

earnings management. They choose the years 1992, 1994 and 1996 and included 282 firm-year

observations from the S&P 500 index and found a negative relationship between earnings

management and board size. They conclude that larger boards are associated with lower levels of

discretionary accruals. An argument for that is that larger boards may bring greater number of

experienced directors to the board. Peasnell, Pope and Young (2005), Rahman and Ali (2006) and

Bradbury, Mak and Tan (2006) found also an association between larger boards and less earnings

management.

The corporate governance literature also suggests that small corporate boards are more effective

monitors than large boards because they have a high degree of membership coordination, less

communication difficulties and a lower incidence of severe free-rider problems (Ahmed, Hossain and

Adams, 2006). Jensen (1993) suggests that agency problems increases with size; as boards increases it

is generally argued that free-rider-problems increases as they do in a team setting. The responsibility

of monitoring management is likely to become more diffused, when less of the burden falls on each

director. So, in smaller boards each individual board member will be more likely to take responsibility

for monitoring of the financial. Another argument for a smaller board is that smaller boards may be

less encumbered with bureaucratic problems (Xie et al., 2003). Yermack (1996) analysed 452 boards

of profit firms in the United States over the period 1984-1991 and he found that smaller boards could

monitor the CEO more effectively.

The CBF sets some guidelines for the supervisory board. In the case of a governing board with a

supervisory board established in accordance with the articles of association the governing board

consists of at least one natural person. Some researchers found a negative association between the size

and earnings management, while others showed a positive association between the variables.

Initially adding more members to a supervisory board enhances the performance however when too

many members are added the performance will decrease due to the free riding problem and less time is

spend on problems like earnings management. The following hypotheses are set:

Hypothesis 6A: The size of the Supervisory Board is quadratic related to Discretionary

Accruals (U-shaped relationship).



Hypothesis 6B: The size of the Supervisory Board is quadratic related to Abnormal, Spending

on Management & Administration, Fundraising Expenses and Objectives (U-shaped relationship).

The existence of an audit committee is not mandated by law or included in the criteria for the CBF-

seal, and not all the fundraising institutions have an audit committee. It is interesting to investigate

whether the existence of an audit committee has a relationship with earnings management at

fundraising institutions.

Prior research has found that the existence and composition of the audit committee has an impact on

financial reporting. There are studies which found an effect between the existence of an audit

committee and earnings management. Turley and Zaman (2004) emphasize the effect of audit

committees on financial reporting quality. Evidence of a positive link between audit committee

existence and the quality of financial reporting had been provided by analysis indicating that earnings

overstatements are less likely among companies that have audit committees and that companies

manipulating earnings are less likely to have audit committees. This is in line with the research of

Baxter and Cotter (2009), who investigated whether audit committees are associated with improved

earnings quality at listed companies on the Australian Stock Exchange (ASX) and found that

formation of audit committees reduces intentional earnings management. Also Davidson, Goodwin-

Stewart and Kent (2005) investigated listed companies on the ASX and found a negative relation

between the existence of the audit committee and earnings management. Peasnell et al. (2005)

investigated United States listed institutions and found no evidence that the presence of an audit

committee directly affects the extent of income manipulations.

Most studies found a negative relationship between the existence of an audit committee and earnings

management which lead to the following hypotheses:

Hypothesis 7A: The Existence of an Audit Committee is negatively related to Discretionary

Accruals.

Hypothesis 7B: The Existence of an Audit Committee is negatively related to Abnormal

Spending on Management & Administration, Fundraising and Objectives Expenses.

6.3.2 Supervisory Board and the Audit Committee Diligence

A proxy used to measure supervisory board and audit committee diligence is the number of meetings.

The motive for that proxy is that inactive supervisory board or audit committees are unlikely to

monitor effectively (Menon and Williams, 1994). The level of activity of a board or committee has



been recommended as important to enhance its effectiveness in improving earnings quality (Baxter

and Cotter (2009), which is related to earnings management. Boards that meet more frequently are

expected to have lower earnings management and therefore report higher quality earnings compared to

boards which seldom meet because boards which meet more frequently are able to allocate more time

on issues such as earnings management (Xie et al., 2003; Rahman and Ali, 2006).

Xie et al. (2003) found a negative association between level of earnings management and the meeting

frequency of the board. This finding is consistent with the idea that an active board may be a better

monitor than an inactive board. In contrast, Vafeas (1999) showed that boards meet more often during

periods of turmoil. Jensen (1993) suggested that boards should be relatively inactive and that boards

are usually forced to maintain higher activity levels in the presence of problems. So, if the board or

audit committee meets not very frequently can be interpreted as stable, with less earnings

management. Boards that meet often can have problems (e.g. earnings management).

Bedard, Chtourou and Courteau (2004) found no association between the number of meetings and

annual discretionary accruals. The research is done in the United States in 1996. In addition, Lin et al.

(2006) and Davidson et al. (2005) found no association between the activity of audit committee

members and earnings management.

There are no specific guidelines for the frequency of supervisory board and audit committee meetings

in the Regelement CBF-keur. The number of supervisory board meetings and the number of times the

members are presented at these supervisory board meetings have to be included in the annual report

(RJ Richtlijn 650). More meetings of the supervisory board and the audit committees can lead to less

earnings management because there is more time to spend on issues in the fundraising institutions (so

better monitoring is possible when the frequency of meetings is higher). However, it can also be

suggested that more meetings are a sign that there are problems in the institutions. More supervisory

board meetings and audit committee meetings may indicate that there are problems in the institutions.

Given the mixed results of prior research the following hypotheses are formed:

Hypothesis 8A: The number of Supervisory Board meetings is related to Discretionary

Accruals.

Hypothesis 8B: The number of Supervisory Board meetings is related to Abnormal Spending

on Management & Administration, Fundraising and Objectives.

Hypothesis 9A: The number of Audit Committee meetings is related to Discretionary Accruals.

Hypothesis 9B: The number of Audit Committee meetings is related Abnormal Spending on

Management & Administration, Fundraising and Objectives.



6.3.3 Tenure of the CEO and the Audit Committee Members

Two conflicting views on the impact of director tenure on board effectiveness can be indicated. One

can argue that more experienced directors have greater knowledge about the firm’s operations that

enable them to exercise better decision control compared to less experienced directors. Beasley (1996)

argue that the likelihood of fraud decreases as the tenure of directors increases. However, if the

directors severed the firm for a long time, their independence is compromised as they become more

likely to befriend management and hence be less critical about the quality of financial reports (Vafeas,

2005; Yang and Krishan, 2005). A CEO who serves the board for a longer period can use his

discretion to manipulate earnings. Based on prior research, which found only support for a positive

relationship between earnings management and CEO tenure so, it is hypnotized that:

Hypothesis 10: The tenure of the CEO is positively related to Discretionary Accruals.

Rahman and Ali (2006) argued that experience of audit committee members allows members to gain a

better understanding of the firm and its people, thus enabling them to develop better governance

competencies. They investigated 97 institutions listed on the Main Board of Bursa Malaysian over

2002 till 2003. However, they found no association between tenure and the level of earnings

management.

Yang and Krishnan (2005), who investigated institutions in the United States, showed that the average

tenure of the audit committee members is negatively associated with quarterly earnings management,

which suggest a possible positive effect of experience with the firm and its accounting. Xie et al.

(2003) found a positive relation between the tenure of outside directors and the level of discretionary

current accruals. Board members with longer tenure as directors, in this case, may be less effective

monitors and perhaps have been co-opted by management.

The Regelement CBF-Keur gives some guidelines for the tenure of the supervisory board members.

The members of the supervisory board resign periodically. Appointments and any re-appointments are

tenable for a maximum period of five years. A negative relationship between the tenure of the audit

committee and earnings management is expected in this thesis:

Hypothesis 11A: The tenure of Audit Committee is negatively related to Discretionary

Accruals

Hypothesis 11B: The tenure of Audit Committee is negatively related to Abnormal Spending

on Management & Administration, Fundraising and Objectives.



6.3.4 Financial Expertise of the Audit Committee

The audit committee expertise is generally considered as an important characteristic for effective

operation. It has been argued that effective oversight by an audit committee requires that the members

possess sufficient expertise in accounting and auditing to assess the matters that are presented to them

(Beasley and Salterio, 2001; DeFond, Hann and Xu, 2005).

Three financial expertises can be distinguished in the literature, namely accounting, finance and

supervisory expertise. The method to measure the expertise of the audit committee is based on

Dhaliwal et al. (2010). The three different expertises will be shortly explained. Assignment of

accounting expertise will be done when a member of an audit committee currently has (or previously

had) work experience as certified public accountants, chief financial officers, vice presidents of

finance, financial controllers, or any other major accounting positions. Finance expertise is assigned to

audit committee members who currently have (or have previously had) work experience as investment

bankers, financial analysts, or any other financial management roles. This is because regulators also

consider those individuals with experience in analyzing or evaluating financial statements as financial

experts. Finally, assignment of supervisory expertise will be done to audit committee members who

currently have (or previously have had) work experience as chief executive officers or company

presidents.

Felo et al. (2003) investigated whether audit committee financial expertise is related to financial

reporting quality for two different time periods. The sample consisted of 119 firms between 1992 and

1993 and analysts’ ranking of a firm’s financial reporting quality from the Association for Investment

Management and Research database as a proxy for financial reporting quality. They concluded that

financial and accounting expertise of the audit committee is positively related to financial reporting

quality. Dhaliwal et al. (2010) examined which type of audit committee expertise (accounting, finance

or supervisory expertise) has a stronger effect on accruals quality in the presence of strong

governance. The sample consisted of 770 firms in the United States. A positive relation between

accounting expertise in audit committees and accruals quality is found but no significant association

between accruals quality and the presence of finance or supervisory expertise in audit committees

showed in their research.

Rahman and Ali (2006) suggested that an audit committee that has knowledge and skills in financial

reporting is more likely to uncover opportunistic earnings management. In line with Rahman and Ali

(2006), Xie et al. (2003) argued that audit committee members with corporate and financial

backgrounds should have experience and training to understand earnings management and therefore

earnings management is less likely to occur. They found evidence that firms with audit committee

members with corporate or financial backgrounds are associated with firms that have smaller

discretionary current accruals.



Bedard et al. (2004) investigated whether the expertise, independence and activities of an audit

committee have an effect on aggressive earnings management. They found that earnings management

is negatively associated with the financial and governance expertise of audit committee members. In

line with that, Yang and Krishnan (2005) reported that earnings management is lower for firms whose

audit committee directors have greater governance expertise.

Contrasting is the research of Baxter and Cotter (2009), who investigated whether audit committees

are associated with improved earnings quality (measured by Jones model and Dechow and Dichev

model) and found no association between earnings management and audit committee accounting

expertise.

Requirements related to the financial expertise are not included in the CBF criteria for receiving the

CBF-seal. Based on the fact that more researchers have found a negative relationship than no

relationship between earnings management and experience of the audit committee, a negative

relationship between the financial, accounting and supervisory expertise of the audit committee and

earnings management in the Dutch fundraising sector is expected. The following hypothesis is set:

Hypothesis 12A: Financial expertise of the Audit Committee is negatively related to

Discretionary Accruals.

Hypothesis 12B: Financial expertise of the Audit Committee is negatively related to Abnormal

Spending on, Administration & Management, Fundraising and Objectives.

Table 6.1 included an overview of the hypotheses set related to the characteristics of the supervisory

board & audit committee and earnings management.

Table 6.1 – Overview Hypotheses: Characteristics Supervisory Board & Audit Committee

Characteristic Predicted Relation on Earnings Management

H 6 A/B Size of the Supervisory Board U-shaped relationship (Quadratic relationship)

H 7 A/B Existence of an Audit Committee -

H 8 A/B Number of Supervisory Board meetings ?

H 9 A/B Number of Audit Committee meetings ?

H 10 A/B Tenure of the CEO +

H 11 A/B Tenure of the Audit Committee members -

H 12 A/B Financial expertise of the Audit Committee

members

-



Chapter 7 – Research Methodology

7.1 Introduction

This chapter includes the research method that will be used to carry out this research. A description

will be given on the sample that will be used to obtain the data, and from which sources the data will

be extracted. Furthermore, the research designs to test the hypotheses depicted in chapter 6 will be

described.

7.2 Sample Selection

A dataset from the CBF is received and consist of 268 Dutch fundraising institutions which have a

CBF-seal. 6 institutions are not usable because they have not a book year ending at December or the

financial statements of the institutions could not be found. The dataset included financial data of the

institutions over 2009 and 2010. However, the received dataset was incomplete and faults were found.

The years (2009 and 2010) of the balance sheet accounts and profit and loss statement items were

confused. Also the account fixed assets and total assets were confused. Based on a sample of 30

randomly selected institutions there is concluded that these items were incorrect and the columns are

changed.

For 262 institutions the current assets and current liabilities over 2009 and 2010 are manually

collected. In order to test the characteristics of the supervisory board and the audit committee on

discretionary accruals and abnormal spending on management & administration, fundraising and

objectives, the 139 largest institutions, based on total assets over 2010 are selected. The largest

fundraising institutions are chosen, because one can expect that these institutions have the most

attention of the public, government and media. For these 139 institutions the supervisory board and

audit committee characteristics, which are mentioned in chapter 6, are manually collected.

The needed data related to the supervisory board and audit committee characteristics is found in

financial statements and annual reports of the selected institutions on the website of the CBF. Some

data related to these characteristics could not be found in the financial statements or annual reports.

For 46 institutions all the necessary data related to the characteristic of the supervisory board and audit

committee is collected. For the other 93 institutions one or more characteristics related to the

supervisory board or audit committee is/are missing. An overview of the sample selection can be

found in table 7.1.



Table 7.1 – Sample Selection

7.3 Research Designs

In the coming paragraphs there will be a description of the approaches in order to test the hypotheses

set in chapter 6. At first, the method to investigate the earnings distribution of fundraising institutions

will be pointed out. Subsequently, the used models to determine discretionary accruals and abnormal

expenses will be explained. Thereafter, the research design to investigate the relationship between

groups and the direction of the discretionary accruals and abnormal expenses will be described.

Finally, the models to examine the relationship between characteristics of the supervisory board &

audit committee and discretionary expenses/abnormal expenses are explained.

7.3.1 Income Distribution

In order to test hypothesis 1 and find out whether the distribution of earnings is discontinuous around

zero, earnings data will be plotted in a histogram and the normality of the distribution of earnings

around zero will be examined. Visual examination of the distribution of income scaled by total income

in preceding year (2009) is performed. Scaling with total income is necessary in order to control for

the size of the institutions.

Besides a graphical examination of the earnings distribution around zero a statistical test, which is

derived from the method developed by Burgstahler and Dichev (1997) will be performed. The

expected number of observations in the interval containing zero is: , its variance will

be: . The test statistic Z is defined as the difference between and

divided by the standard deviation, approximately follows the standard normal

distribution. N is the overall number of observations, the observed probability of falling

into the interval containing zero, the nearest interval with lower earnings, and the nearest interval with

higher earnings.

Initial data obtained 268

Unusable due to other book years or financial statements not available (11)

Sample to test hypotheses 1 till 5 257

Largest institutions in the initial data obtained (based on total assets 2010) 139

Missing data points related to characteristics supervisory board and audit committee (93)

Sample to test hypotheses 6 till 12 46



7.3.2 Detection Earnings Management Through Discretionary Accruals and Abnormal Expenses

Earnings management through accruals will be measured by the (modified) Jones models, which are

explained and discussed in chapter 3. Based on the method used by Jones (1991) total accruals will be

calculated. However, the change in current maturities of long term debt is not included in the

calculation. This account could not be received from the CBF neither it was manually collectable.

Naturally the accounts long term debt can be found in the financial statements, however the part which

mature in one year cannot be found. The modified Jones model and the Jones model are used because

these models are complementary. The Jones model suffers type II errors and model I suffers type I

errors, so using the two models can give an insight into the different outcomes of the models.

Besides investigating earnings management through accruals there will also be an examination of

earnings management via real variables. As mentioned in chapter 4 the focus will be on earnings

management through expenses of management & administration, fundraising and spending on

objectives. Measuring normal management & administration expenses, fundraising expenses and

spending on objectives is based on the discretionary abnormal expenses model of Roychowdhury

(2006) who built his model based on Dechow, Kothari and Watts (1999). For an explanation of the

model of Roychowdhury (2006) see appendix D.

The three models which will be used to measure the normal expenses are:

With:

= Management & Administration costs for institution i at year t;

= Total assets at period t-1 for institution i;

= Total income during period t for institution i, and;

= Error term.

With:

= Fundraising costs for institution i at year t.



With:

= Spending on objectives for institution i at year t.

The abnormal management & administration expenses, abnormal fundraising expenses and abnormal

spending on objectives are the residuals of the models.

Model 4 expresses the total abnormal expenses. The model included the residuals of models 1, 2, and

3, which are the abnormal spending on management & administration, fundraising and objectives.

With:

= Total abnormal expenses for institution i at year t;

= Total abnormal management & administration expenses for institution i at

year t;

= Total abnormal fundraising expenses for institution i at year t;

= Total abnormal spending on objectives for institution i at year t.

It has to be noticed that Roychowdhury (2006) investigated R&D expenses, SG&A expenses and

marketing expenses. Furthermore, the model of Roychowdhury (2006) is used to measure normal and

abnormal expenses in the profit sector. The model of Roychowdhury (2006) will be used to measure

normal and abnormal expenses in the non-profit sector, nevertheless there is no indication that

differences in the profit and non-profit sector for determining the normal and abnormal expenses

exists. For that reason a model extracted from the profit sector will be used in this thesis to

investigated the abnormal expenses in the fundraising sector.



7.3.3 Groups and the Direction of Discretionary Accruals and Abnormal Expenses

In order to test hypotheses 2 till 5 different groups will be distinguished: the fundraising institutions in

the sample will be divided into six different groups based on their earnings before discretionary

accrual (EBDA). There will be an examination whether a relation between the groups and the direction

of the discretionary accruals exists.

In addition, there will be tested whether a relation between the groups and the direction of the total

abnormal expenses (management & administration, fundraising and spending on objectives expenses)

exists. Groups are formed based on earnings before total abnormal expenses (EBTAE) to test whether

this relation exists. Furthermore, groups are composed based on earnings before abnormal

management & administration expenses (EBAMAE), earnings before abnormal fundraising expenses

(EBAFE) and earnings before abnormal spending on objectives (EBASO).

In order to determine EBDA, discretionary accruals will be calculated through the Jones model and are

cleared with the earnings over 2010. The EBAMAE will be determined by clearing the earnings with

the abnormal management & administration expenses. The same is done for the EBAFE and EBASO.

In addition, the EBTAE will be calculated by clearing the earnings with the abnormal management &

administration expenses, abnormal fundraising expenses and abnormal spending on objectives. EBDA,

EBTAE, EBAMAE, EBAFE, and EBASO are scaled by total income in order to control for the size of

the fundraising institutions.

The following groups can be distinguished:

Group 1 – This group consists of institutions with EBDA or EBTAE larger than -,5. The limit of -,5 is

chosen arbitrary, because no further rules were found in prior literature. Institutions in this group have

large losses and it is expected that managers of the intuitions ’take a bath’. It is expected that managers

of this group use negative discretionary accruals and positive abnormal expenses in order to decrease

earnings further.

Group 2– The managers of this group use negative discretionary accruals and positive abnormal

expenses, while they have positive EBDA and/or EBTAE. The earnings of these institutions are

unexpectedly managed towards a (large) negative result, which is against the idea that managers of

fundraising institutions manage their earnings towards zero or a small positive result. So, this group

consists of institutions which manage earnings towards a negative result which means that they do not

follow the expected pattern of managing earnings towards zero or a small positive result.

Group 3 – Institutions which have negative EBDA or EBTAE will fall in this group. It is expected that

managers strive towards zero or small positive result. In order to accomplish that, managers will use

positive discretionary accruals and negative abnormal expenses.



Group 4 –Institutions which have positive EBDA or EBTAE will be included in this group. It is

expected that managers of this group would like to reduce their income in order to come close to zero

earnings. This will be accomplished by using negative discretionary accruals and positive abnormal

expenses.

Group 5 – Fundraising institutions which have negative EBDA or EBTAE will fall in this group.

Managers of this group use positive discretionary accruals and negative abnormal expenses to prevent

reporting negative results. However, the reported earnings are highly positive. Managers of this group

unexpectedly do not strive towards zero or a small positive result, which is not in line with the idea

that managers of the institutions strive towards a small positive or zero result.

Group 6 – This group consist of institutions which use positive discretionary accruals and negative

abnormal expenses in order to increase their income. Managers of this group do not decrease their

earnings to come to a small positive result, which would be in line with the theory.

Figure 7.1 – Graphical Presentation of the Expectations for each Groups

4

1 2

3 6

5

0 EBDA/EBTAE

In conclusion, managers of fundraising institutions which fall in group 3 and 4 strive towards zero or a

small positive result, which can be accomplished by using discretionary accruals or abnormal

expenses. It is expected, based on the theory that non-profit institutions strive towards zero or a small

positive result, that the most institutions will fall into these groups. Managers of group 1 manage their

earnings downwards, because it is not likely that they can use discretionary accruals and/or abnormal

expenses to come close to a zero or small positive result. Groups 2, 5 and 6 consist of the institutions

which unexpectedly do not strive towards zero or a small positive result.

After forming groups, a chi-square test will be performed in order to test whether a relation exists

between the direction of the discretionary accruals & abnormal expenses and the groups. It is expected

that institutions which fall in group 4 an 1 use more often negative (positive) discretionary accruals



(abnormal expenses) than expected. Institutions which fall in group 3 use more often positive

(negative) discretionary accruals (abnormal expenses) than expected and institutions of group 1 use

more often negative (positive) discretionary accruals (abnormal expenses) than expected. Managers of

group 2, 5 and 6 manage their earnings unexpectedly not towards zero and it is predicted that these

groups will not include many fundraising institutions.

7.3.4 Supervisory Board and Audit Committee Characteristics on Earnings Management

Hypotheses 6 till 12 are formulated in chapter 6. The empirical models to examine the relationship

between characteristics of the supervisory board & audit committee and discretionary accruals &

abnormal expenses will be described in this paragraph.

The following model will be used to investigate the relationship between the characteristics of the

supervisory board & audit committee and earnings management by using accruals.

As mentioned before, the discretionary accruals will be calculated through the Jones model and the

modified Jones model. The absolute value of the discretionary accruals will be the dependent variable

in the regressions. The absolute value is chosen because the focus of this study is on the degree of

earnings management and not whether the discretionary accruals increases or decreases the earnings.

When using the absolute values, a relationship between the supervisory board and audit committee

characteristics and earnings management is more easy to found than using the real values.

The following models (model 2, 3, 4 and 5) will be used to investigate the relationship between

abnormal expenses and characteristics of the supervisory board and audit committee:



The regressions as presented in the models above will be produced in the next chapter. In addition the

regressions will be created with a quadratic term SBSIZE², because in chapter 6 a quadratic effect

between the size and dependent variables is predicted.

Table 7.2 included the descriptions of the variables of the above equations.

Table 7.2 – Variable Descriptions

Variables Description

Dependent Variables:

ABS DA Absolute value discretionary accruals

ABS AMAE Absolute value abnormal management & administration

ABS AFUNE Absolute value of the abnormal fundraising expenses

ABS ASO Absolute value of the abnormal spending on objectives

ABS TAE Absolute value of the abnormal spending on management & administration, fundraising

and objectives

Independent Variables:

SBSIZE Number of supervisory board members

SBSIZE² The squared number of supervisory board members,

ACEXI Dummy variable for having an audit committee

SBMEET Number of supervisory board meetings

ACMEET Number of audit committee meetings

CEOTEN Number of years of board service of the CEO

ACTEN The average number of years of the audit committee service

FINEX Dummy variable for having experience in accounting, finance and/or supervisory



Chapter 8 – Results

8.1 Introduction

In this chapter the results of the empirical research will be discussed. sub questions 6 till 8 will be

answered:

- What is the impact of the size of supervisory board and the existence of the audit committee on

earnings management at Dutch fundraising institutions?

- What is the impact of the frequency of the supervisory board and audit committee meetings on

earnings management Dutch fundraising institutions?

- What is the impact of the tenure of the Chief Executive Officer (CEO) (In Dutch: voorzitter

Raad van Bestuur) and the audit committee members on earnings management at Dutch

fundraising institutions?

- What is the impact of financial expertise of the audit committee members on earnings

management at Dutch fundraising institutions?

At first, the results of the investigation of the earnings distribution of fundraising institutions will be

depicted. Subsequently, the analysis of the used models to determine discretionary accruals and

abnormal expenses will be discussed. Thereafter, the outcomes of the relation tests between groups

and the direction of the discretionary accruals and abnormal expenses will be described. Finally, the

regression results, which examine the relationship between characteristics of the supervisory board &

audit committee and discretionary accruals & abnormal expenses, will be shown and discussed. Only

the main tables an figures are included in this theses, additional analysis (tables and figures) can be

found in the appendixes.

8.2 Income Distribution

The results of the earnings distribution will be examined to conclude whether the distribution of

earnings is discontinuous around zero. Table 8.1 present the descriptive statistics of the Earnings (t)

scaled by Total Income (t-1). If an observation differs three times the standard deviation or more form

the mean, the observation is declared as an outlier and is deleted. A range between -0,8423 and 0,9517

is formed to examine the normality of the distribution. Table 8.2 presents descriptive statistics without

outliers.



Table 8.1 - Descriptive Statistics

N Minimum Maximum Mean Std. Deviation

Earnings (t) scaled by Total Income (t-1) 263 -2,61 1,76 ,0547 ,29900

Valid N (listwise) 263

Table 8.2 - Descriptive Statistics, Outliers Excluded


Earnings (t) scaled by Total Income (t-1) 257 -,64 ,95 ,0495 ,18885


Figure 8.1 shows that the frequency of the interval of small losses between -,05 and 0,0 is less than the

frequency of the interval 0,0 and 0,05. Just before the zero line there are approximately 40

observations and after the zero line almost 80. So, small losses occur less than small profits; a

discontinuity can be observed around zero. However, a statistical test has to be done to conclude if the

distribution is discontinuous. As mentioned in the research design the research approach of Burgsthler

and Dichev is used to investigate the continuity around zero statistically. The Z-statistic for interval

0.0; 0.05 is 8.14 and for the interval -.05; .00 a Z-statistic of -7.68 is calculated. These values are

significant, implying a discontinuity around zero. In appendix E a table is presented including the

observed count for each interval.

In addition, a histogram with the same range and interval used by Burgstahler and Dichev (1997) is

produced. Figure 8.2 shows the earnings scaled by total income with an interval width of 0,005 and a

range from -.25 to + .35, which is used by Burgstahler and Dichev (1997). The figure shows that the

frequency of the interval of small losses between -,05 and 0,0 is less than the frequency of the interval

0,0 and 0,05. Just before the zero line there are approximately 6 observations and after the zero line

11. Small losses occur less than small profits; a discontinuity can be observed around zero. A

statistical test has to be done to conclude whether the distribution is discontinue. The Z-statistic for

interval 0.000; 0.005 is 1.56 and for the interval -.005; 0.00 , a Z-statistic of -3,05 is calculated.

However, it cannot be concluded whether earnings are managed; it can also be the case that there was

good control within the fundraising institutions



Figure 8.1 - Histogram Earnings (t) scaled by Total Income (t-1); interval width 0,05

Figure 8.2 – Histogram Earnings(t) scaled by Total Income (t-1), interval width 0,005



8.3 Models to Detect Earnings Management Through Discretionary Accruals and Abnormal

Expenses

In this paragraph the results related to the (modified) Jones models and the normal expenses models

will be described.

The process of deriving the discretionary accruals and abnormal expenses (management

&administration, fundraising and spending on objectives) can be found in appendix G. The

assumptions of the (modified) Jones model and normal expenses models are tested and can be found in

appendix F.

(Modified) Jones Model

The descriptive statistics of the accrual and expenses models are presented in table 8.3.

Table 8.3 – Descriptive Statistics Variables (Modified) Jones Model


1/Total Assets (t-1) 253 3,35072E-9 ,0000147639 7,74576388E-7 ,000001515016

∆Rev /Total Assets (t-1) 253 -5,961 1,941 ,077 ,528

∆Rev-∆Rec / Total Assets (t-t) 262 -5,254 2,458 ,061 ,502

PPE(t)/Total Assets (t-1) 252 0E-10 100,203 ,491 6,308

Total Accruals(t) /Total Assets (t-1) 253 -1,840 1,995 -,011 ,297


The (unstandardized) residuals are used to estimate the discretionary accruals for both the Jones model

and the modified Jones model. The process for getting the discretionary accruals can be found in

Appendix G. The regression of the Jones model lead to the following equitation:

The regression of the modified Jones model results in the following equitation:



Normal Expenses Models

Table 8.4 present the descriptive statistics of the variables Normal Expenses Models.

Table 8.4 – Descriptive Statistics Variables Normal Expenses Models


MA/Total Assets(t-1) 246 ,00 1,46 ,1 ,1

SO/Total Assets (t-1) 263 ,02 51,77 1,4 3,3

FUN/Total Assets(t-1) 238 ,00 1,17 ,1 ,2

1/Total Assets (t-1) 253 3,35072E-9 ,00001476 7,74576388E-7 ,000001515912

Total Income (t-1)/Total Assets (t-1) 263 ,05 57,56 1,6 3,7


The (unstandardized) residuals of the normal expenses models, as presented in paragraph 7.3.2, are the

abnormal spending on management & administration, fundraising and objectives. The residuals of the

three types of expenses (management and administration, fundraising and spending on objectives)

models form the total abnormal expenses. The process to determine the abnormal expenses can be

found in Appendix G. The following equations are composed:

8.4 Groups and Direction of Discretionary Accruals and Abnormal Expenses

As mentioned in the research design, groups are formed in order to investigate whether a relation

exists between the groups and the direction of the discretionary accruals. In addition, there will be an

examination whether a relation exists between the groups and the direction of abnormal expenses

(management & administration, fundraising and spending on objectives). In table 8.5 and 8.6 the cross

tables are presented. For each cross table a chi-square test is done in order to conclude whether the

observed and expected count differ significantly. Based on the chi-square tests, which can be found in

appendix H, it can be concluded that there is a relation between the groups and the direction of the

discretionary accruals. A relation between groups and abnormal expenses (management &

administration, fundraising and spending on objectives) is also proved. The chi-square tests and cross

tables for these relations can also be found in appendix H.



After concluding that the relations are significant (based on the chi-square tests), the cross tables have

to be interpreted to determine the direction of the relation between groups and discretionary accruals

and abnormal expenses. Based on table 8.5, one can conclude that group 4 uses more (less) often

negative (positive) discretionary accruals than expected. In addition, group 3 uses more (less) often

positive (negative) discretionary accruals than expected. Furthermore, the cross table shows that

managers of group 1 use more (less) often positive (negative) discretionary accruals implying that

managers increase income by using positive discretionary accruals. So managers of group 1 do not

take a bath and use negative accruals in order to decrease income. Finally, institutions in groups 2, 5

and 6 do unexpectedly not strive towards zero or a small positive result as a consequence it was

predicted that these groups will not include a lot of institutions. Few fundraising institutions fall within

these groups, which is in line with the expectations.

Table 8.5 – Cross table Direction Discretionary Accruals and Groups

The cross table of the direction of the total abnormal expenses is only included in the thesis. The cross

tables for each type of abnormal expenses (management & administration, fundraising and objectives)

can be found in appendix H. The individual cross tables of the 3 types abnormal expenses show the

same tendency as the total abnormal expenses. The focus will be on the total abnormal expenses

because the focus of this thesis is on the effect of the total abnormal expenses.

Based on table 8.6, which shows the cross table for the total abnormal expenses, one could conclude

that group 4 use more (less) often positive (negative) abnormal expenses than expected. Furthermore,

group 3 uses more (less) often negative (positive) abnormal expenses than expected. The cross table

shows that managers of group 1 are willing to increase income by using negative abnormal expenses,

so they do not take a bath and use positive abnormal expenses in order to decrease their income

further.



In addition, institutions in groups 2, 5 and 6 do not strive towards zero or a small positive result and it

was expected that these groups do not include a lot of institutions. Some institutions fall within these

groups, so this is in line with the expectations.

Table 8.6 – Cross table Direction Total Abnormal Expenses

The relations between the groups and the direction of the discretionary accruals and abnormal

expenses are tested separately: the total effect of both the discretionary accruals and abnormal

expenses is not investigated. Overall, it can be concluded that a relation exists between the groups and

the direction of the discretionary accruals Furthermore a relation is found between groups and the

direction of abnormal expenses. Managers of fundraising institutions use discretionary accruals and

abnormal expenses in order to report earnings close to zero or a small positive result. Managers do not

take a bath if their earnings are highly negative. If earnings are very high, managers use discretionary

accruals to reduce earnings. However they do not use abnormal expenses in order to decrease earning.

In this chapter the distribution of the earnings of Dutch fundraising institutions around zero are

examined. In addition there is tested whether discretionary accruals and abnormal expenses are used to

manage earnings towards zero or a small positive result. These tests are performed in order to

investigate the relationship between characteristics of the supervisory board & audit committee and

earnings management. The discretionary accruals and abnormal expenses are measures for earnings

management and will be the Y-variables in the regressions. The regressions will be presented and

discussed in the next paragraph. It is necessary to determine whether the discretionary accruals and

abnormal expenses are a good measures of earnings management in order to perform the regressions.

Based on the distribution approach one cannot conclude that earnings are managed at Dutch

fundraising institutions, because it is not possible to observe whether good control or earnings

management result in more observations just after the zero line. Based on the chi-square tests and

cross tables, one could conclude that managers use discretionary accruals and abnormal expenses in

order to manage earnings towards zero or a small positive result.

60 Earnings Management at Dutch Fundraising Institutions; the Impact of Characteristics of the Supervisory Board & Audit Committee


8.5 Supervisory Board an Audit Committee Characteristics on Earnings Management

In table 8.7 the descriptive statistics of the variables related to the characteristics of the supervisory

board, audit committee, discretionary accruals and abnormal expenses can be found.

Table 8.7 - Descriptive Statistics

Variable N Minimum Maximum Mean Std. Deviation

ABS DA (Jones) 252 ,000103 1,85 ,1585 ,24284

ABS DA (Modified Jones) 252 ,000130 1,99 ,1580 ,24474

ABS AMAE 236 ,000132 ,65 ,0514 ,08505

ABS AFUNE 231 ,0016 1,02 ,0817 ,12285

ABS ASO 253 ,0008 3,05 ,2624 ,31354

ABS TAE 226 ,0025 3,72 ,3484 ,41683

Supervisory board and audit committee variables

SBSIZE 129 1 40 8,73 6,714

SBSIZE² 138 1 1600 101,25 221,340

ACEXI 130 0 1 ,46 ,500

SBMEET 116 1 12 4,80 1,861

ACMEET 46 1 7 3,09 1,363

CEOTEN 117 0 25 4,77 4,656

ACTEN 46 0 11 3,54 2,610

FINEX 138 0 1 ,28 ,448

Valid N 40

Variable definitions:

ABS DA(Jones) = the absolute value of discretionary accruals based on Jones (1991)

ABS DA (Modified Jones) = the absolute value of discretionary accruals based on Dechow et al. (1995)

ABS AMAE = the absolute value of the abnormal management & administration expenses

ABS AFUNE = the absolute value of the abnormal fundraising expenses

ABS ASO = the absolute value of the abnormal spending on objectives

ABS TAE = the absolute value of the total abnormal expenses (management & administration, fundraising

and spending on objectives)

Supervisory board and audit committee variables:

SBSIZE = the number supervisory board members

SBSIZE² = the squared number supervisory board members

ACEXI = a dummy variable coded 1 if an audit committee exists at a fundraising institution, and 0

otherwise.

SBMEET = the number of meetings held by the supervisory board

ACMEET = the number of meetings held by the audit committee.

CEOTEN = tenure of the CEO

ACTEN =average tenure of the audit committee members

FINEX =a dummy variable coded 1 if the audit committee has at least one member with financial

experience (finance, supervisory or accounting experience), and 0 otherwise.

The number of observations of the variables ACMEET and ACTEN are very low (46) for that reason

ACMEET and ACTEN will be excluded in the models in order to get regressions which are based on a

higher number of observations. In appendix I an overview of the regression analysis which includes all

the variables can be found.



Table 8.8 contains results of the regression models with the dependent variable ABS DA. In model 1

and 3 the linear variables SBSIZE, ACEXI, SBMEET, CEOTEN, and FINEX are tested on

discretionary accruals, which are calculated via the (modified) Jones Model. In model 2 and 4 the

quadratic variable SBSIZE² is added because hypothesis 6A predicted a quadratic relationship between

SBSIZE and discretionary accruals.

All the regression models are significant: models 1, 3, and 4 at 5% level and model 2 at 10% level,

implicating that the individual coefficients can be interpreted. The models have R-squares between

10.9 % and 14,9% , which indicated that the model explains minimal 10.9%% of the variation in the

discretionary accruals of the fundraising institutions in the sample. Yang and Krishnan (2005), who

investigated the relationship between audit committee characteristics and quarterly earnings

management in the United States based on 896 firm-year observations, reported R-squares around

3.1% and 16,2%.

A negative relationship in regression 1 and 3 is found between the size of the supervisory board

(SBSIZE) and discretionary accruals. A possible reason why a negative relationship is found is based

on the argument that adding more members enhances the performance of the members. Larger boards

allow for more specialized division of labour and increases monitoring ability of boards, resulting in

less earnings management. Adding the quadratic effect in model 2 and 4 does not improve model 1 nor

model 3. Meaning that there is no curvilinear (u-shaped) relationship between the size of the

supervisory board and discretionary accruals: hypotheses 6A is not supported.

In advance, no expectation for the direction of the variable SBMEET on discretionary accruals is

formed in hypothesis 8A. Regressions 3 and 4 indicate a positive relationship between the number of

supervisory meetings (SBMEET) and discretionary accruals. This result could be explained by the

idea that more supervisory board meetings indicate the presence of problems in the fundraising

institutions. Boards which meet not very often can be interpreted as stable, with less earnings

management.

Hypothesis 10A predicted that the CEO tenure is positively related to discretionary accruals.

Unexpectedly, the coefficient CEOTEN is negative in all the models. Furthermore, a negative

relationship between the existence of an audit committee (ACEXI) cannot be proved. In addition a

negative relationship between financial experience of the audit committee members (FINEX) and

discretionary accruals is not found. These two variables are not significant in any model; hypotheses

7A and 12A cannot be proved.



8.8– Regression Discretionary Accruals

Dependent variables

1 2 3 4 Independent variables ABS DA ABS DA ABS DA ABS DA

(Jones Model) (Jones Model) (Mod. Jones Model) (Mod. Jones Model) SBSIZE -0.002 -0.002 -0.001 -0.002 (0.147) (0.255) (0.090)* (0.190) SBSIZE ² -2.372E-005 -1.672E-005 (0.336) (0.670) ACEXI -0.023 -0.023 0.001 0.002

(0.276) (0.286) (0.926) (0.912) SBMEET -0.001 -0.001 0.005 0.005 (0.786) (0.732) (0.065)* (0.086)* CEOTEN -0.005 -0.005 -0.003 -0.003 (0.004)*** (0.004)*** (0.014)** (0.013)** FINEX 0.016 0.015 0.002 0.002 (0.491) (0.503) (0.891) (0.908) Constant 0.130 0.135 0.067 0.001

(0.000)*** (0.000)*** (0.000)*** (0.000)***

Significance model (0,054)* (0.088)* (0,020)** (0.036)**

N 99 99 89 89

R-Square 10.9% 11.0% 14.7% 14.9%

Variables definitions: ABS DA(Jones) = the absolute value of discretionary accruals based on Jones (1991)









SBSIZE² = the squared number supervisory board members


otherwise.







***, **, and * denote significance at the 0.01, 0.05, and 0.10 levels, respectively.

Table 8.9 contains results for the regression models with the dependent variable ABS AMAE, ABS

AFUNE, ABS ASO and ABS TAE. In regressions 5, 7, 9 and 11 the linear variables SBSIZE, ACEXI,

SBMEET, CEOTEN, and FINEX are tested on abnormal expenses (management & administration

expenses, fundraising expenses, spending on objectives and total abnormal expenses). In regressions 6,



8 and 10 the quadratic effect of SBSIZE² is added in order to examine whether the quadratic effect will

improve the model 5, 7 and 9. When interpreting the p-values of the regressions it can be concluded

that only the models 5 and 6 are significant. As a consequence only the coefficients of model 5 and 6

can be interpreted.

Hypothesis 7B states that the existence of an audit committee (ACEXI) is negatively related to

abnormal management & administration expenses. The result presented in table 8.9 does not support

this hypotheses: a positive relationship is found between ACEXI and abnormal management &

administration expenses. The existence of an audit committee lead to more abnormal management and

administration expenses.

Hypothesis 12B predicted that the financial experience of that audit committee is negatively related to

abnormal expenses. As shown in table 8.9, this hypothesis is supported: a negative relationship

between the financial experience of audit committee members (FINEX) and abnormal management &

administration expenses is found.

Hypotheses 6B, 8B, and 10B cannot be proved because the size of the supervisory board (SBSIZE),

the number of supervisory board meetings (SBMEET) and the tenure of the CEO (CEOTEN) are not

significant.



Table 8.9 – Regression Abnormal Expenses

Dependent variables

5 6 7 8 9 10 11 Independent variables ABS AMAE ABS AMAE ABS AFUNE ABS AFUNE ABS ASO ABS ASO ABS TAE

SBSIZE -0.000279 -0.000306 -0.001 -0.001 0.001 0.001 0.002 (0.341) (0.357) (0.934) (0.341) (0.552) (0.464) (0.392) SBSIZE² -4.971-009 2.376E-005 -4.706E-008 (0.862) (0.239) (0.700) ACEXI 0.021 0.021 0.014 0.014 0.028 0.028 -0.011 (0.001)*** (0.001)*** (0.077)* (0.085)* (0.227) (0.236) (0.761) SBMEET -0.001 -0.001 -0.001 0.001 0.008 0.008 0.003 (0.429) (0.808) (0.422) (0.319) (0.057)* (0.081)* (0.620) CEOTEN -0.000304 -0.000292 -0.001 -0.000443 0.003 0.003 0.004 (0.489) (0.4513) (0.319) (0.424) (0.106) (0.125) (0.160) FINEX -0.020 -0.020 -0.013 -0.012 -0.031 -0.032 -0.016 (0.003)*** (0.001)*** (0.144) (0.156) (0.210) (0.210) (0.697) Constant 0.014 0.014) 0.042 0.037 0.082 0.083 0.141

(0.055)* (0.061)* (0.000)*** (0.000)*** (0.004)*** (0.004)*** (0.003)**

Significance model (0,011)** (0.023)** (0,427) ( 0.390) (0.199) (0.279) (0.608)

N 97 97 96 96 90 90 90

R-Square 14.0% 14.8% 5.2% 6.7% 8.2% 8.4% 3.1%

Variable definitions: ABS DA(Jones) = the absolute value of discretionary accruals based on Jones (1991)









SBSIZE² = the number supervisory board members


otherwise.










Chapter 9 – Conclusion, Limitations and Implications for Further Research

This thesis focused on earnings management at Dutch fundraising institutions. Throughout the years

research has been conducted with respect to earnings management in the profit sector, while the non-

profit sector is getting less attention. Prior literature to earnings management in the non-profit sector

mainly includes research conducted in the health care sector and municipalities. There is a very small

base of literature on earnings management at fundraising institutions. Fundraising institutions and the

discretionary methods to mange spending and efficiency ratios are investigated, however this thesis

investigated earnings management at Dutch fundraising institutions. In addition, research has been

done with respect to earnings management and corporate governance (supervisory board and audit

committee characteristics) aspects in the profit sector. This thesis investigated the relationships

between characteristics of the supervisory board & audit committee and earnings management in the

Dutch fundraising institutions.

The following research question is composed:

“What is the effect of supervisory board & audit committee characteristics on earnings

management through discretionary accruals and abnormal expenses at Dutch fundraising

institutions?”

In order to answer the research question the concept of (real) earnings management is discussed. The

definition of earnings management as noticed by Scott (2006) has been used throughout this

thesis:“The choice by a manger of accounting policies, or actions affecting earnings, so as to achieve

some specific objectives.” Managers of fundraising intuitions have an information advantage over

stakeholders. Due to information asymmetry it is possible for managers to manage earnings, since

stakeholders have little information to assess whether the disclosed financial statements are reliable.

There are a number of reasons why managers engage in earnings management. Healy and Wahlen

(1999) have structured these reasons into three incentives for engaging in earnings management:

capital market expectations and valuation, contract written in terms of accounting numbers and anti-

trust or other government regulations. These incentives are related to the profit-sector.

Incentives to apply earnings management in the non-profit sector differ from those in the profit sector.

Prior research is mainly done at non-profit hospitals in the United Kingdom and United States. An

important incentive for fundraising institutions to engage in earnings management is related to anti-

trust or other government regulation. Fundraising institutions are visible for the society and are subject

to the political agenda. High profitability can lead to increased political heat and public debate and as a

consequence a decrease of the donation base. Based on that, it is expected that fundraising institutions

manage their earnings towards zero or a small positive result.



This thesis also focused on the relationship between characteristics of the supervisory board & audit

committee and (real) earnings management. Based on prior research, it is expected that the size of the

supervisory board, the number of supervisory board & audit committee meetings, the tenure of the

CEO & audit committee members, and the financial experience of the audit committee members have

a relationship with discretionary accruals and abnormal expenses of Dutch fundraising institutions.

After setting out prior research related to earnings management, hypothesis are formulated and

empirical research is done. Different approaches are used to detect earnings management at Dutch

fundraising intuitions. At first, the income distribution of Dutch fundraising institutions is discontinue

around. However, it cannot be concluded that this is an effect of earnings management or good control

within the institutions. Subsequently, groups are formed (based on EBDA) to investigate whether a

relation exists between groups and the direction (positive or negative) of discretionary accruals.

Furthermore, an examination of the relation between groups (based on EBAE) and the direction of the

abnormal expenses (abnormal spending on management & administration, fundraising and objectives)

is done. A relation between groups and discretionary accruals & abnormal expenses is found. Earnings

are managed towards zero or a small positive result. Moreover, results suggested managers do not take

‘a big bath’ if their earnings are highly negative by using negative discretionary accruals and/or

positive abnormal expenses.

Supervisory board & audit committee characteristics and its relationship with discretionary accruals

and abnormal expenses is investigated. A negative relationship between the size of the supervisory

board and discretionary accruals is found. Furthermore, results show that the number of supervisory

board meetings is positively related to discretionary accruals. A negative relationship between

financial expertise of the audit committee members and discretionary accruals was expected.

However, this relationship cannot be proved.

Prior literature discussed in this thesis found evidence for a positive relationship between the tenure of

the CEO and earnings management. Unexpectedly, the results show that the tenure of the CEO is

negatively related to discretionary accruals. The ethical behaviour and the moral of CEOs at non-profit

institutions compared to CEOs at profit institutions can be an explanation for finding a negative

relationship between the tenure of the CEO and earnings management.

Bower and Shrader (2000) investigated differences in moral reasoning and ethical climate between

board members in profit institutions and non-profit institutions at the United States. Six profit

institutions and seven non-profit corporations participated in the survey study. They argue that

although CEOs who serve on for-profit and non-profit institutions are generally in the same age and

have similar educational levels, the motives and expectations for serving on a non-profit board are

different from those serving on a for profit board. A CEO for a non-profit institution is seeking some

type of esoteric reward and is often committed to making decisions in the best interest of the



stakeholders which are served by the institution. Non-profit CEOs are not charged with the role of

oversight as in for profit institutions which has CEOs chosen to protect the shareholders’ interests

(Bower and Shrader, 2000). In addition, less ethical behavior of the CEOs is expected in the for profit

sector because non-profit CEOs are closer and often more accountable to their constituents which may

influence the ethical appearance of their decisions (Metzger and Dalton, 1996). The decisions made

would generally not contribute to the personal wealth. However, for-profit CEOs often stand to benefit

or suffer personal consequences for decisions (Bower and Shrader, 2000). Based on these arguments

one could carefully conclude that CEOs of fundraising institutions make decisions based on the best

interest of the stakeholders, and as a consequence do not manage earnings. The longer the CEO serves

the board, the better the understanding of the institutions and its stakeholders. Furthermore, CEOs at

fundraising institutions do not suffer personal consequences as a result of the reported earnings and are

for that reason less willing to manage earnings. It has to be noticed that the results and explanations

for the outcomes have to be interpreted very carefully. Further research has to be conducted on this

aspect in order to generalize the results of this thesis to other non-profit institutions and to fundraising

institutions in other countries.

Unexpectedly, no relationship between discretionary accruals & abnormal expenses and the existence

of an audit committee was found in this research. Prior studies indicated a negative relationship

between the existence of an audit committee and earnings management. However, it has to be noticed

that these studies were done at profit-institutions. Based on results in this thesis, one could carefully

conclude that the existence of an audit committee at non-profit institutions has no relation with

earnings management. In addition, it can be cautiously concluded that a difference is found in the

impact of the existence of an audit committee on earnings management at non-profit institutions and

profit institutions. The existence of an audit committee will lead to less earnings management at profit

institutions but the existence of an audit committee will not have an impact on earnings management

at non-profit institutions. If this result found in this study is confirmed in the future, it can be

concluded with more certainly that the impact of the audit committee is not related to earnings

management at non-profit institutions and that a difference in the existence of an audit committee at

profit institutions and non-profit institutions is found.

Due to the insignificance of the other regressions, only the model related to characteristics of the

supervisory board & audit committee and abnormal management and administration can be

interpreted. Consistent with previous research, a negative relationship between financial expertise and

abnormal spending on management & administration is found. The size of the supervisory board, and

number of board meetings are not related to abnormal management & administration expenses.

As with every research there are several limitations that should be taken into account with regard to

the results. At first, the selection of a small number of institutions limits the power of the statistical



tests. The power of a test decreases when fewer observations are included. Due to reasons of time and

resource availability, it was not possible to investigate more institutions. Moreover, the small number

of observations has an effect on the ability to generalize the results to all fundraising institutions.

Another limitation is that this research is conducted on Dutch fundraising institutions. Generalizing the

results of this research to other countries should be done carefully. Future research can be focused on

the relationship between characteristics of the supervisory board & audit committee and earnings

management at fundraising institutions in other countries in order to generalization of outcomes

possible.

The research has been done by analyzing financial statements of fundraising institutions. Data is

received from the CBF and some data is manually gathered. Corrections in the dataset are made,

because mistakes were found. Despite these corrections, errors can exist in the dataset which could

have an impact on the outcomes of the analysis. Assumptions are made about the incentives to apply

earnings management. The theoretical background of this thesis is mainly built on research done at

profit institutions and at non-profit institutions outside the Netherlands. Differences can exist between

profit institution, non-profit institutions and countries. This can lead to other outcomes in the

fundraising sector (non-profit) than in the profit sector. This has also an effect on comparability of the

results. Furthermore, the estimations of the discretionary accruals and abnormal expenses are

debatable; the independent variables are not normally distributed and could indicate that the regression

analysis are impropriate to apply.

Earnings management is focused on the intention of the management, the use of earnings management

itself is not measured. Qualitative research methods should be performed in order to measure the use

of earnings management. Internal information about specific accounts which are used to manage

earnings are needed. Getting that kind of information will be hard, because it is expected that

managers will not communicate whether or not earnings are managed. Due to that this research is

focused on detecting the use of earnings management through the distribution approach, discretionary

accruals and abnormal expenses. However, this type of research can be done in the future.

An interesting point for further research is the order of application accruals or real variables to manage

earnings. Managers can influence accounting income by using different methods. Some methods

require real transactions while some are pure accounting decisions. Zang (2011) found that managers

determine real manipulation before accrual manipulation. Moreover, Graham, Harvey and Rajgopal

(2005) suggested that firms switched to managing earnings using real methods, possibly because these

techniques are likely to be harder to detect. Further research can be done related to the application of

(real) earnings management if an audit committee exists at fundraising institutions. It is interesting to

investigate whether institutions which have an audit committee tends towards using real variables (e.g.

abnormal expenses) and institutions without an audit committee are more likely to use accruals.



Finally, this research focused on the relationship between characteristics of the supervisory board &

audit committee and earnings management at the largest (based on total assets) fundraising

institutions. However, further research can be conducted to earnings management and the subgroups

(health, international aid, nature & environment and well-being & social goals) in the population.



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Appendix A - Model for the Balance sheet and the Profit and Loss statement

Figure A.1 - Model for the Profit and Loss statement Figure A.2- Model for the Balance Sheet



In order to allocate costs at the profit and loss statement, figure A.3 have to be

filled in.

Figure A.3 – Model for Cost Allocation.



Appendix B - Translation of governance bodies

English Dutch

Board of Directors Directie

Governing board Bestuur

Titular execution Titulaire directie

Statutory board Statutaire directie

Supervisory body Toezichthoudend orgaan (RvT)

General assembly meeting Algemene ledenvergadering (ALV)

Audit Committee Auditcommissie

Based on: Seal Regulations CBF Seal of Approval (English version), 2010



Appendix C – Literature overview; Characteristics Board of Directors & Audit Committee on Earnings

Management

Authors Subject of study Sample Methodology Results

Abbott, Parker

and Peters

(2000)

The impact of certain audit

committee characteristics identified

by the Blue Ribbon Committee on

improving the effectiveness of

corporate audit committees on the

likelihood of financial misstatement.

Examination of 83

firms which misstated financial

reports in the period 1991-1999,

together with a matched pairs

control group of similar size.

Regressions They find that independence of the

committee is negatively related to

misstatement, but the size of the committee

and the financial expertise of the audit

committee members are not related

Ahmed, Hossain

and Adams

(2006)

This study tests the relation between

earnings informativeness and the

structure of corporate boards in New

Zealand.

Sample consists of 615 firm-year

observations. Firms are listed on

the NZ exchange for the years

1991 through to 1997.

Regressions Smaller boards are more effective than a

larger boards in monitoring the quality of

earnings.

Baxter and

Cotter (2009)

Investigation whether audit

committees are associated with

improved earnings quality, measured

by Jones model (1991) and Dechow

and Dichev model (2002).

The sample consists Australian

listed companies.

Matched pairs

t-test and

regressions

Intentional earnings management is

reduced when an audit committee is

formed. They also found differences in the

associations between audit committee

accounting expertise and the two earnings

quality measures.

Beasley and

Saltero (2001)

This study examines the relation

between board of director

characteristics and the extent that

audit committee composition

voluntarily exceeds minimum

mandated levels and includes outside

directors with accounting and audit

committee knowledge and

experience.

Sample is based on firms

included in the Report on

Business 1000 Canadian firms

(which represent a listening of

1,000 most profitable firms) for

fiscal year 1994. 627 Canadian

firms are included in the sample.

Regressions The results confirm the prediction that

firms with greater representation of outside

directors on the board, firms that segregate

the board chairperson and CEO positions,

and firms with larger boards are more

likely to create audit committees that

voluntarily include more outsiders than

Canadian corporate law requires, and those

firms are more likely to voluntarily include

outsiders on the audit committee with a



greater breadth of financial reporting and

audit committee knowledge and

experience.

Bedard,

Chtourou and

Couteau (2004)

Investigation whether expertise,

independence, and activities of the

audit committee have an effect on

the quality of financial information

(measured by abnormal accruals)

Sample is drawn from

population of US firms that are

included in Compustat in 1996.

From that population 100 firms

with the highest income

decreasing abnormal accruals,

100 highest income increasing

abnormal accruals, and 100 with

the lowest abnormal accruals are

identified.

(Logit)Regressi

on model

Aggressive earnings management is

negatively associated with the financial and

governance expertise of the audit

committee members, with indicators of

independence, and the presence of a clear

mandate defining responsibilities of the

committee.

Bradbury, Mak

and Tan (2006)

The purpose of this paper is to

examine the relation between board

and audit committee characteristics

and accounting quality (measured by

abnormal accruals).

Sample comprises of 139 firms

listed on the Singapore Stock

Exchange and 113 firms listed

on the Kuala Lumpur Stock

Exchange for the year 2000.

Regressions Board size and audit committee

independence are related to lower

abnormal working capital accruals.

Furthermore, the relation between audit

committee independence and higher

quality accounting exists only when the

abnormal accruals are income increasing.

Davidson,

Goodwil-

Stewart and

Kent (2005)

Research the role of the internal

governance structure of a firm in

constraining earnings management

434 listed Australian firms, for

the financial year ending in

2000.

Regressions Lower likelihood of earnings management

when majority of the board and audit

committee consists of non-executives.

Negative association between earnings

management and the existence of an audit

committee.

DeFond, Hann

and Xu (2005)

Testing the whether the market react

positively to the appointment of

directors with financial expertise to

the audit committee.

850 newly appointed outside

board members assigns to audit

committees during 1993-2002.

Corporate library database is

used to make a sample selection.

Regressions Positive CARs around the appointment of

accounting financial experts to the audit

committee is found, but not around the

appointment of non-accounting financial

experts or directors without financial

expertise.



DeZoort and

Salterio (2001)

This study reports the investigation

whether audit committee members’

corporate governance expertise and

financial reporting and audit

knowledge affect their judgements in

auditor-corporate management

conflict situations

68 Canadian audit committees

members

Regressions Consistent with the calls for audit

committees to be made up of independent

directors and who are financially literate

Dhaliwal,

Naiker and

Navissi (2010)

Investigation of the association

between three types of audit

committee financial expertise

(accounting, financial and

supervisory) and accrual quality.

Final sample consists of 770

firms out of COMPUSTAT and

Board Analyst databases during

2004 to 2006

Cross-sectional

regressions

The most positive impact on accruals

quality is achieved when firms posses a

combination of both accounting and

finance and supervisory experts in the audit

committee

Felo,

Krishnamurthy

and Solieri

(2003)

The researchers examine the

relationship between the

composition (expertise and

independence) and the size of the

committee – and the quality of

financial reporting.

The sample consists of firms

from the 1992-93 and 1995-96

AIMR Review of Corporate

Reporting Practices. 119 firms

are included for the period 1992-

93, and for 1995-96 130 firms.

Regressions After controlling for firm size, board

composition and institutional ownership,

the percentage of audit committee

members having expertise in accounting or

financial management is positively related

to financial reporting quality. In addition

some evidence is found of a positive

relation between the size of the audit

committee and financial reporting quality.

Jouber and

Fakhfakh (2010)

Investigation of the relationship

between board of directors’

characteristics and earnings

management.

180 French and Canadian listed

firms ‘data over 2006-2008

Regressions Evidence shows that CEO stock

ownership, independent monitoring and

institutional investor's property are strong

earnings management determinants.

Leadership structure and board size seem

to be neutral.



Lin, Li and

Yang (2006)

Researchers focus on the association

between several characteristics of

the audit committee (size, expertise,

independence, activity and stock

ownership) and earnings

management, proxied by earnings

restatements.

106 publicly held corporations

in the USA, which restated their

reported earnings for the fiscal

year 2000 and 106 control firms.

They are matched based on four-

digit SIC code and total assets.

Univariate

correlations

and (Logistic)

Regression

Negative association between the size of

the audit committee and the occurrence of

earnings restatement is found. For the other

characteristics, no relation is found

Peasnell, Pope

and Yang (2005)

Examination whether the incentives

of earnings management depends on

board monitoring

Tests are conducted using data

from UK listed firms. Sample

consists of 1,271 firm-years

OLS

regressions and

Logistic

regression

The likelihood of managers making

income-increasing abnormal accruals to

avoid reporting losses and earnings

reductions is negatively related to the

proportion of outsiders on the board. Little

evidence found that outside directors

influence income-decreasing abnormal

accruals when pre-managed earnings are

high. Also no evidence that they presence

of an audit committee directly affects the

extent of income-increasing manipulations

to meet or exceed these thresholds. Neither

do audit committees appear to have a direct

effect on the degree of downward

manipulation, when pre-managed earnings

exceed thresholds by a large margin.

Rashidah and

Ali (2006)

Investigation the extent of the

effectiveness of monitoring

functions of the board of directors

and the audit committee.

97 firms listed in the Main Board

of Bursa Malaysia over 2002-

2003

Regressions Earnings management is positively related

to the size of the board of directors. No

significant relation between independence

of the board and the audit committee on

earnings management found. Ethnicity has

no effect on mitigating earnings

management.

Turley and

Zaman (2004)

Providing a synthesis and evaluation

of empirical research on the

governance effects associated with

audit committees.

Discussion of prior literature,

suggests a number of general

observations concerning the

development of future research

Literature

review

No automatic relationship between the

adoption of audit committee structures or

characteristics and the achievement of

particular governance effects, and caution



A framework for analyzing the

impact of audit committees is

described, identifying potential

perceived effects which may have

led to their adoption and documented

effects on aspects of the audit

function, on financial reporting

quality and on corporate

performance.

may be needed over expectations that

greater codification around factors such as

audit committee members’ independence

and expertise as the means of ‘‘correcting’’

past weaknesses in the arrangements for

audit committees. The most fundamental question concerning

what difference audit committees make in

practice continues to be an important area

for research development.

Vafeas (1999) This study examines whether the

frequency of board meetings helps in

reducing the problem of limited

director interaction.

1,382 observations for 307 firms

over the period 1990 to 1994 are

included in the sample.

Regressions Overall the results suggest that board

activity is an important dimension of board

operations.

Vafeas (2005) This research examines how the

structure and activity of audit

committees and the structure of

corporate boards relate to the quality

of earnings information produced by

firms. To study the link between

boards and audit committees with

earnings quality, two proxies for

poor earnings quality are used: small

earnings increases and negative

earnings avoidance.

The sample compromised an

panel of data over a seven-year

period, ranging from 252 U.S

firms in 1995 to 182 U.S firms in

2000, with a total of 1,621firm-

year observations.

(Logistic)

Regressions

and regressions

of changes in

audit

committees and

boards on the

indicators of

poor earnings

quality.

Results related to small earnings increases

are consistent with prior literature. Audit

committee insiders are associated with

lower quality, active business executives

protect management over shareholders, and

audit committee meeting frequency is

associated with higher earnings quality.

The results on negative surprise avoidance

compare modestly with prior research;

equity incentives increases earnings quality

and length of board tenure decreases

earnings quality.

Xie, Davidson

III and DaDalt

(2002)

Examination of the role of the board

of directors, the audit committee and

the executive committee in

preventing earnings management.

Sample is based on the first 110

(alphabetically) from the S&P

500 index as listed in the June

S&P directory for each of the

year’s 1992, 1994 and 1996. The

final sample consists of 282

firm-year observations

Regressions Earnings management is less likely to

occur or occurs less often in companies

whose boards include both more

independent outside directors and directors

with corporate experience. The

composition of the audit committee is

associated with the level of earnings

management. The proportion of audit



committee members with financial

expertise is negatively related to the level

of earnings management. There is also an

association between lower levels of

earnings management and the meeting

frequency of boards and audit committees.

Yang and

Krishan (2005)

Testing the association between

audit committee characteristics

(independence, number of meetings,

financial expertise, stock ownership,

outside directorships, experience,

tenure, number audit committee

members) and measures of quarterly

earnings management.

896 firm-year observations for

the years 1996-2000.

Regressions Quarterly earnings management is lower

for firms which audit committee directors

have greater governance expertise. In

addition, the extent of stock ownership of

audit committee directors is positively

associated with quarterly earnings

management. Furthermore, the average

tenure of

audit committee directors is negatively

associated with quarterly earnings

management.

Yermack (1996) Finding evidence consistent with

theories that small boards of

directors are more effective

Firms drawn from the annual

Forbes magazine ranking of the

500 largest U.S public

corporations. Sample of 3,438

observations of 452 U.S public

companies across 1984 and

1991.

Regressions An inverse association between board size

and firm value is found. The association

appears to have a convex shape, suggesting

that the largest fraction of lost value occurs

as boards grow from small to medium size.



Appendix D – Explanation Normal Discretionary Expenses Model of

Roychowdhury (2006)

Discretionary expenses included: R&D, advertising, and SG&A expenses. Institutions can reduce or

increase reported expenses. The following model is used by Roychowdhury (2006) in order to

determine normal discretionary expenses:

When estimating non-discretionary accruals it is general convention in the literature in the literature to

include a scaled intercept,

. This avoids spurious correlation between scaled DISEX and scaled

sales due to variation in the scaling variable, total assets. The unscaled intercept is included to ensure

that the mean abnormal DISEX for every industry-year is zero. The variable

is used because

including

created a problem; if managers manage sales upward to increase earnings in any year

they can exhibit unusually low residuals even when they do not reduce discretionary expenses.

Table D.1 shows how sales and R&D expenses are related; if sales increase the R&D expenses will be

higher. The error represent the abnormal R&D expenses.

Table D.1 – Graphical Presentation Abnormal Discretionary Expenses Model

Discretionary expenses (like R&D)

o error Abnormal Discretionary Expenses

Sales

Fundraising institutions do not have sales, so for that reason total income is included as a substitute for

sales.



Appendix E – Earnings Distribution

Table E.1 – Income smoothen, interval width 0,05

Interval Observed count

-,65; -,60 1

-,60; -,55 0

-,55; -,50 0

-,50 ; -,45 0

-,45; -,40 1

-,40; -,35 2

-,35; -,30 1

-,30; -,25 3

-,25; -,20 4

-,20; -,15 3

-,15; -,10 15

-,10; -,05 17

-,05; 0,00 39

0,00; 0,05 79

0,05; 0,10 30

0,10; 0,15 17

0,15; 0,20 11

0,20; 0,25 8

0,25; 0,30 2

0,30; 0,35 7

0,35; 0,40 2

0,40; 0,45 3

0,45; 0,50 4

0,50; 0,55 1

0,55; 0,60 2

0,60; 0,65 1

0,64; 0,70 1

0,70; 0,75 0

0,75;0,80 0

0,80 ; 0,85 1

0,85 ; 0,90 1

0,90 ; 0,95 1

Interval 0 ; 0,05 0,05 ; 0,0

N 257 257

po 34,5 48

p- 0,151 0,066

p+ 0,12 0,31

Variance 29,86 39,035

St. deviation 5,47 6,25

Z- statistic 8,14 -7,68

Interval 0 ; 0,005 -0,005 ; 0,0

N 230 230

po 7 9

p- 0,026 0,030

p+ 0,0348 0,050

Variance 6,787 8,648

St. deviation 2,60 2,94

Z statistic 1,54 -3,06



Appendix F – Assumptions of the (Modified) Jones Models and Normal

Expenses Models

(Modified) Jones Model

Before using the (Modified) Jones Model to calculate the discretionary accruals it is necessary to test

the underlying assumptions of the multiple regression model.

In order to apply regression analysis the independent variables need to meet the assumption of

normality. To test whether the independent variables are normally distributed the Kolmogorov-

Smirnov test is performed (Table F.1). The following hypothesis can be formed:

.

.

In all the cases the level of significance is less than alpha (0,05), therefore the null hypothesis is

rejected.

Table F.1 – Normality test for the independent variables

Besides the normality assumption for the independent variables there are other assumptions related to

the residuals which have to be met:

Normality of errors;

Linearity;

Homoscedaticity or equal variance

Independence of errors;

These assumptions will be tested for both the Jones model and the Modified Jones model.

Kolmogorov-Smirnov Test

PPE (t) ∆Rev ∆Rev-∆Rec Total Assets (t-1) Total Accruals(t)

N 264 266 265 263 253

Normal Parametersa,b Mean 2378587,05 468404,56 752172,1 16991953,7 -382844,2

Std. Deviation 11123304,3 6354929,4 5274788,8 41139929,0 3001515,8

Most Extreme

Differences

Absolute ,415 ,295 ,304 ,340 ,255

Positive ,374 ,295 ,304 ,312 ,218

Negative -,415 -,292 -,260 -,340 -,255

Kolmogorov-Smirnov Z 6,748 4,809 4,947 5,512 4,048

Asymp. Sig. (2-tailed) ,000 ,000 ,000 ,000 ,000

a. Test distribution is Normal.

b. Calculated from data.



Normality of errors

Regression assumes that the residuals have normal distributions. To check this assumption a normal

probability plot is constructed. In the plots the standardized residuals, the actual scores are ranked and

sorted and an expected normal value is calculated. The plots are shown in figure F.1 and F.2. The

residuals are normally distributed if the actual values will up along the diagonal. In the both plots a

kind of pattern can be observed.

Figure F.1 – Normal probability plot of the standardized residuals of the Jones Model

Figure F.2 – Normal probability plot of the standardized residuals of the Modified Jones

Model



Linearity and Homoscedasticity

To test linearity and equal variances the plot of standardized residuals versus predicted scored is

produced (Figures F.3 and F.4). The assumption of linearity is met since the graphs below do not show

some kind of patterns. The observations are distributed randomly. Equal variances require that the

variation around the line of the plot must be constant at all values. The values are equally distributed

around zero, which indicate homoscedasticity.

Figure F.3 –Standardized residuals against predicted residuals for the Jones model

Figure F.4 – Standardized residuals against predicted residuals for the Modified Jones model



Independence

Independence of errors requires that the residuals around the regression line must be independent for

each value of X. Independence of the residuals can be tested by the Durbin Watson statistic. The

Durbin Watson statistic for the Jones model is 2,215 and for the Modified Jones model is 2,197. If the

variables are not correlated the statistic have to be close to zero, so it can be concluded that the

residuals are independent for both the Jones model and the Modified Jones model.

Normal Expense Models

The same assumptions tested for (Modified) Jones Model are tested for the Normal Expenses Models.

Before using the Normal Expenses Models to calculate the abnormal expenses it is necessary to test

the underlying assumptions of the multiple regression model.

In order to apply regression analysis the independent variables need to meet the assumption of

normality. To test whether the independent variables are normally distributed the Kolmogorov-

Smirnov test is performed. The normality of the variable total assets (t-1) is tested in table F.1, so only

the variable Total Income (t-1) will be tested. The following hypothesis can be formed:

.

.

In all the cases the level of significance is less than alpha (0,05), therefore the null hypothesis is

rejected.

Table F.2 – Normality test for the independent variables

One-Sample Kolmogorov-Smirnov Test

Total Income (t-1)

N 266

Normal Parametersa,b Mean 12625425,41

Std. Deviation 29877490,59

Most Extreme Differences

Absolute ,337

Positive ,313

Negative -,337

Kolmogorov-Smirnov Z 5,502

Asymp. Sig. (2-tailed) ,000

a. Test distribution is Normal.

b. Calculated from data.



Normality of errors

To check the normality of errors a normal probability plot is constructed (figures F.5,F.6 and F.7). The

residuals are normally distributed if the actual values will up along the diagonal. In the plots a kind of

pattern can be observed.

Figure F.5 – Normal probability plot of the standardized residuals of the Normal

Management & Administration Expense Model.

Figure F.6 – Normal probability plot of the standardized residuals of the Normal Fundraising

Expenses Model.



Figure F.7 – Normal probability plot of the standardized residuals of the Normal Spending on

Objective Expenses Model.

Linearity and Homoscedasticity

The assumption of linearity is met since the graphs below do not show some kind of patterns (figures

F.8, F.9 and F.10). The observations are distributed randomly. Equal variances require that the

variation around the line of the plot must be constant at all values. The values are not equally

distributed around zero, which indicate no homoscedasticity.

Figure F.8 –Standardized residuals against predicted residuals for the Normal Management

& Administration Expenses Model.



Figure F.9 –Standardized residuals against predicted residuals for the Normal Fundraising

Expenses Model.

Figure F.10 –Standardized residuals against predicted residuals for the Normal Spending on

Objective Expenses Model.

Independence

The Durbin Watson statistic for the Normal Management & Administration Model is 2,239 and for the

Normal Fundraising Expenses model 2,020 and for the Normal Spending on Objectives model 2,148.

If the variables are not correlated the statistic have to be close to zero, so it can be concluded that the

residuals are independent for both the Normal Expenses Models.



Appendix G – Significance of the (Modified) Jones models and Normal

Expenses Models

Jones model

The Jones model used is shown below (Jones, 1991):

Table G.1 indicated that at least one of the coefficients are significantly different from zero, the p-

statistic is 0,018 and below the 0,05 cut-off.

Table G.1 – Jones model regression significance

One-way model regression significance

Sum of Squares df Mean Square F Sig.

Regression 1,096 3 ,365 4,289 ,006b

Residual 21,134 248 ,085

Total 22,231 251

a. Dependent Variable: Total Accruals (t)/Total Assets (t-1)

b. Predictors: (Constant), 1/Total Assets (t-1), ∆ REV/Total Assets (t-1), PPE (t)/Total Assets (t-1)

In table G.2 the individual coefficients can be found. The variables 1/Total Assets (t-1) and ), PPE

(t)/Total Assets (t-1) are insignificant. Nevertheless, the variables are included in the model because

prior research supports this variables as a significant component within the model. The rather small

sample size could influence the outcomes of the regression statistics and the significance of the

variables.

Table G.2 – Jones Model coefficients

Unstandardized

Coefficients

Standardized

Coefficients

t Sig.

B Std. Error Beta

(Constant) -,010 ,021

-,487 ,627

1/Total Assets (t-1) -11641,625 12153,553 -,059 -,958 ,339

∆REV/Total Assets (t-1) ,118 ,050 ,209 2,332 ,020

PPE (t)/Total Assets (t-1) -,0004 ,004 -,009 -,097 ,923




Table G.4 – Summary of the Jones Model

R R Square Adjusted R

Square

,222a ,049 ,038

a. Predictors: (Constant), PPE(t)/Total Assets(t-1), 1/Total Assets (t-1),

∆REV/Total Assets (t-1)

b. Dependent Variable: Total Accruals(t)/Total Assets (t-1)

Given the adjusted R square value shown in table G.4 the model explains 4,9% of the variation

between the model and the observed values.

Modified Jones Model

The Modified Jones model is shown below (Dechow et at. 1995):

Based on table G.5 there can be concluded that at least one of the coefficients is significantly different

from zero, the p-statistic is 0.016 which is below the cut-off of 0,05. The coefficients of table G.6. can

be interpreted.

Table G.5 – Modified Jones model regression significance



Regression ,909 3 ,303 3,523 ,016b

Residual 21,322 248 ,086

Total 22,231 251


b. Predictors: (Constant), 1/Total Assets (t-1), ∆Rev-∆Rec/Total Assets(1-t), PPE (t)/Total Assets (t-1)



Table G.6 – Modified Jones Model Coefficients

Unstandardized

Coefficients

Standardized

Coefficients

t Sig.

B Std. Error Beta

(Constant) ,013 ,022

,600 ,549

1/Total Assets (t-1) -15231,627 12502,584 -,078 -1,218 ,224

PPE(t)/Total Assets (t-1) -,012 ,004 -,259 -3,107 ,002

∆Rev-∆Rec/Total Assets (t-1) -,088 ,049 -,151 -1,791 ,075


When looking at the coefficients of table G.6 one can conclude that only the variable PPE (t)/Total

Assets (t-1) is significant in the regression ( 0,002<0,05). Nevertheless, the insignificant variables are

included in the model because prior research supports this variables as a significant component within

the model. The rather small sample size could influence the outcomes of the regression statistics and

the significance of the variables.

Table G.8 – Summary of the revised Modified Jones model


Square

,202a ,041 ,029

a. Predictors: (Constant),∆Rev-∆Rec/Total Assets (1-t), 1/Total Assets (t-1),

PPE(t)/Total Assets (t-1)

b. Dependent Variable: Total Accruals (t)/Total Assets (t-1)

Normal Management & Administration Expenses Model

The following model will be used to measure abnormal management and administration expenses:





Table G.9 – Normal M&A Expenses model regression significance


Regression 2,952 2 1,476 148,074 ,000b

Residual 2,323 233 ,010

Total 5,275 235

a. Dependent Variable: Management & Administration Expenses (t)/Total Assets (t-1)

b. Predictors: (Constant), 1/Total Assets (t-1),Total Income (t-1)/Total Assets (t-1)

Table G.10 indicates that all the variables in the model are significant.

Table G.10 – Normal Management & Administration Expenses Model coefficients

Unstandardized

Coefficients

Standardized

Coefficients

t Sig.

B Std. Error Beta

(Constant) -,002 ,009 -,189 ,850

1/Total Assets (t-1) 46692,657 4577,669 ,459 10,200 ,000

Total Income (t-1)/Total Assets (t-1) ,049 ,005 ,482 10,713 ,000

a. Dependent Variable: Management & Administration Expenses (t)/Total Assets (t-1)

The model explains 56% of the variation between the model and the observed values (see table G.11).

Table G.11 – Summary of the Normal Management & Administration Expenses model


Square

,748a ,560 ,556

a. Predictors: (Constant), 1/Total Assets (t-1), Total Income (t-1)/Total Assets (t-1)

b. Dependent Variable: Management & Administration Expenses (t)/Total Assets (t-1)

Normal Fundraising Expenses Model

The following model is formed to measure Normal fundraising expenses:





Table G.12 – Normal Fundraising Expenses model regression significance



Regression ,939 2 ,470 21,354 ,000b

Residual 5,014 228 ,022

Total 5,954 230

a. Dependent Variable: Fundraising Expenses (t)/Total Assets (t-1)

b. Predictors: (Constant), Total Income (t-1)/Total Assets t-1, 1/Total Assets(t-1)

Based on table G.13one can conclude that the variable 1/Total Assets(t-1) is significant

As mentioned before, the insignificant variables are included in the model.

Table G.13 – Abnormal Fundraising Expenses coefficients

Unstandardized

Coefficients

Standardized

Coefficients

t Sig.

B Std. Error Beta

(Constant) ,047 ,014 3,442 ,001

1/Total Assets(t-1) 4987,926 6861,341 ,046 ,727 ,468

Total Income(t-1)/Total Assets(t-1) ,042 ,007 ,383 6,085 ,000

a. Dependent Variable: Fundraising Expenses (t)/Total Assets (t-1)

The R square of the model is 15.8 % and can be found in Table G.15.

Table G.15 – Summary of the revised Normal Fundraising Expenses model


Square

,397a ,158 ,150

a. Predictors: (Constant), Baten/At-1, 1/Ait-1

b. Dependent Variable: Fundrasing/At-1

Normal Spending on Objectives Model

The following model is formed to measure the normal spending on objectives:



Table G.16 – Normal Spending on Objectives Model regression significance



Regression 287,195 2 143,598 850,823 ,000b

Residual 42,194 250 ,169

Total 329,389 252

a. Dependent Variable: Spending on Objectives (t)/Total Assets (t-1)

b. Predictors: (Constant), 1/Total Assets (t-1), Total Income (t-1)/Total Assets (t-1)

Table G.17 presents the coefficients of the normal spending on objectives model; all the variables are

significant.

Table G.17 – Normal spending on Objectives coefficients

Unstandardized

Coefficients

Standardized

Coefficients

t Sig.

B Std. Error Beta

(Constant) ,162 ,037 4,419 ,000

1/Total Assets (t-1) 46657,061 17858,725 ,062 2,613 ,010

Total Income (t-1)/Total Assets (t-1) ,725 ,019 ,914 38,615 ,000

a. Dependent Variable: Spent on Objectives (t)/Total Assets (t-1)

The R square of the model is 87,2% and can be found in Table G.18.

Table G.18 – Summary of the Normal Spending on Objectives model

R R Square Adjusted R Square

,934a ,872 ,871

a. Predictors: (Constant), 1/Total Assets (t-1),Total Income (t)/Total Assets (t-1)

b. Dependent Variable: Spending on Objectives/Total Assets (t-1)



Appendix H – Chi-square Tests for Comparing Groups

In tables H.1, H.3, H.6 and H.7 the outcomes of the chi-square tests can be found. Based on these test

one can conclude that a relation between the direction of the discretionary accruals & abnormal

expenses and groups exist.

The cross tables can be found in tables H.2, H.4and H6. Based on the tables there can be concluded

that managers of group 4 use more (less) often negative (positive) abnormal expenses on management

& administration, fundraising and objectives. In addition, managers of group 3 use more (less) often

positive (negative) abnormal expenses on management & administration, fundraising and objectives.

Groups 2, 5 and 6 (the groups which do not use abnormal spending to strive towards zero or a small

positive results) are small and in some tables they do not exist at all.

Table H.1 – Chi-square test Groups and Direction of Discretionary Accruals

Value df Asymp. Sig. (2-sided)

Pearson Chi-Square 67,377a 5 ,000

Likelihood Ratio 76,350 5 ,000

Linear-by-Linear Association 12,965 1 ,000

N of Valid Cases 253

a. 6 cells (50,0%) have expected count less than 5. The minimum expected count is 1,96.

Table H.2 – Cross table Direction Abnormal Management and Administration Expenses

Table H.3 – Chi-square test Groups and Direction Abnormal Fundraising Expenses






a. 6 cells (60,0%) have expected count less than 5. The minimum expected count is ,39.



Table H.4 – Cross table Direction Abnormal Fundraising Expenses

Table H.5 – Chi-square test Groups and Direction Abnormal Fundraising Expenses






a. 6 cells (60,0%) have expected count less than 5. The minimum expected count is ,72.

Table H.6 – Cross table Direction Abnormal Spending on Objectives

Table H.7 – Chi-Square Test Groups and Direction of Abnormal Spending on Objectives






a. 4 cells (33,3%) have expected count less than 5. The minimum expected count is 1,88.



Appendix I – Regressions Discretionary Accruals and Abnormal Expenses,

All Variables Included

This appendix included regressions of all the variables on the absolute value of the discretionary

accruals and abnormal expenses. Only linear variables are included in this regression because no

quadratic relationships between SBSIZE and discretionary accruals and abnormal expenses are found

in chapter 8. When interpreting the results it have to be noticed that the regressions are based on a very

small number of observations (between 35 and 37). In the future regressions can be done with the

same variables but with a larger amount of observations.

Regressions 1, 2, and 4 are significant, implying that the coefficients of that models can be interpreted.

SBSIZE is not significant in any regression even as ACMEET, so hypotheses 6A, 6B, 9A and 9B

cannot be proved. The tenure of the CEO (CEOTEN) is significant in regressions 1 and 4, however the

direction of the coefficients are different in these models. CEOTEN is negatively related to

discretionary accruals and CEOTEN is positively related to abnormal fundraising expenses. In model

4 the tenure of the audit committee members (ACTEN) is positively related to abnormal fundraising

expenses. This outcome is not in line with hypothesis 11.



Table I.1 – Regressions, all characteristics of the supervisory board & audit committee included

Dependent variables

1 2 3 4 5 6 Independent variables Abs DA Abs DA Abs AMAE Abs AFE Abs ASOE Abs TAE

(Jones) (Mod. Jones) SBSIZE -0.002 -0.002 -0.0003 -0.001 -0.002 -0.002 (0.334) (0.137) (0.584) (0.153) (0.414) (0.525) SBMEET -0.001 0.002 -4.837E-005 0.004 0.010 0.009 (0.726) (0.473) (0.976) (0.045)** (0.089)* (0.345) ACMEET 0.008 0.007 0.003 0.001 0.002 -0.002 (0.270) (0.191) (0.278) (0.788) (0.818) (0.905) CEOTEN -0.005 -0.002 0.001 0.002 0.004 0.011 (0.024)* (0.141) (0.345) (0.020)** (0.211) (0.025)** ACTEN -0.001 0.004 0.001 0.003 0.002 0.006 (0.778) (0.235) (0.293) (0.056)* (0.783) (0.463) FINEX 0.006 -0.019 -0.020 -0.014 -0.034 0.009 (0.761) (0.208) (0.005)* (0.103) (0.198) (0.835) Constant 0.089 0.060 0.018 0.018 0.104 0.066 (0.043)* (0.089)* (0.230) (0.334) (0.085)* (0.491)

Significance model (0.029)* * (0.077)* (0.109) (0.060)* (0.488) (0.342)

N 37 35 36 36 36 36

R-Squared 35.6% 31.7% 28.5% 32.4% 16.1% 19.1%

Variables definitions: ABS DA(Jones) = the absolute value of discretionary accruals based on Jones (1991)










otherwise.








earnings management at dutch fundraising institutions: the - cbf

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