Determinants of Earnings Management among Retail Chains in Nairobi County

Abstract

Earnings management is still present subject since the 1960s and that previous studies only focused on examining how, why and in which situations earnings management is pursued and the expected consequences from earnings management behavior. But most of the previous works have not focused on private companies.  Furthermore, previous studies on the presence of earnings management in both public and private companies has shown that it does occur but that the outcomes vary and they are sometimes contradictory. This motivated this study to fill the contextual and conceptual research gaps by focusing on the determinants of earnings management in retail chains in Nairobi County which are privately owned companies. Since studies have mainly focused on listed firms. A descriptive survey design was adopted. Both primary and secondary data was used for the study. A multivariate regression model was used to achieve the study variables. The results revealed that contracting motivations and industry performance have a positive and significant influence on earnings management while bonus system and regulatory requirements have a positive but not significant influence on earnings management. The study recommends that supermarkets should reduce the number of contracting motivations such as external contract incentives with suppliers, external contract incentives with customers, the availability of bonus contract and the presence of contacts relating to loyalty programmes as a result of better performance since it significantly increases engagement in earnings management activities. The study also recommends that there is a need for supermarkets to have contingency plans to counter changes and volatility of macroeconomic environment since it increases engagement into earnings management. Supermarkets can also consider reducing the presence of bonus systems such as the compensation of senior management attached to performance, private control benefits by the managers, retirement benefits, the pressure for wage increments and the need for a new employee to increase their future income potential since it increases engagement in earnings management.

Key Words: Earnings Management, Retail Chains, Nairobi County, Kenya