Bank Earnings Management Using Commission and Fee Income: The Role of Investor Protection and Economic Fluctuation

Journal of Applied Accounting Research (2019)

22 Pages Posted: 12 Nov 2018 Last revised: 2 May 2019

See all articles by Peterson K Ozili

Peterson K Ozili

University of Essex - Essex Business School; Central Bank of Nigeria

Erick R Outa

Charles Darwin University

Date Written: 2019

Abstract

We investigate whether banks use commission and fee income to manage reported earnings as an income-increasing or income smoothing strategy. We find that banks use commission and fee income for income smoothing purposes and this behaviour persist during recessionary periods and in environments with stronger investor protection. The implication of the findings is that bank non-interest income which achieves diversification gains to banks is also used to manipulate reported earnings. Our findings show that real earnings management is prevalent among banks in Africa. Further research into earnings management should examine real earnings management among non-financial firms in developing regions. From an accounting standard setting perspective, our evidence suggests the need for national/international standard setters to adopt strict revenue recognition rules that ensure that banks or firms report the actual fees they make, and to discourage banks from delaying (or deferring) the collection of fee income to manage or smooth reported earnings opportunistically.

Keywords: Earnings Management; Commission and Fee Income; Non-interest Income; Real Earnings Management; Income Smoothing; Economic Condition; Investor Protection; Banks

JEL Classification: G21; G28; G34; M41

Suggested Citation

Ozili, Peterson Kitakogelu and Outa, Erick R, Bank Earnings Management Using Commission and Fee Income: The Role of Investor Protection and Economic Fluctuation (2019). Journal of Applied Accounting Research (2019). Available at SSRN: https://ssrn.com/abstract=3270317

Peterson Kitakogelu Ozili (Contact Author)

University of Essex - Essex Business School ( email )

Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom

Central Bank of Nigeria ( email )

Plot 33, Abubakar Tafawa Balewa Way
Central Business District, Cadastral Zone
Abuja
Nigeria

Erick R Outa

Charles Darwin University

Ellengowan Dr, Casuarina NT
Darwin, 0810
Australia

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