Earnings Management, Timeliness, and Corporate Information Systems

Abstract

Does information system (IS) quality limit earnings management and contribute to financial reporting timeliness? While prior work has studied causes and constraints of earnings management and timeliness, the role of IS quality has not been considered. However, IS quality may facilitate and thus expedite financial statement preparation, and limit earnings management by, among other things, enabling the use of sophisticated software to more effectively prevent earnings manipulations and detect fraud indicators. Still, IS quality may also improve managers’ ability to manage and time the financial statement information due, for example, to increased information asymmetry between managers and external financial statement users. Using a broad sample that spans the 14-year period, 2001-2014, our primary findings demonstrate that IS quality is associated with reduced earnings management activities and improved financial reporting timeliness. These findings hold even after controlling for a multitude of variables demonstrated by prior research to explain earnings management and timeliness, and are robust to alternative definitions of the dependent and independent variables and estimation methods. Our findings may help financial statement users — outsiders (investors, financial analysts, and external auditors) and insiders (audit committees) — in assessing a firm’s earnings quality, and regulators in their effort to improve financial reporting quality and timeliness.

Keywords: Earnings Management, Timeliness, Corporate Information Systems, Earnings Response Coefficient

JEL Classification: M41, M40