Enterprise Risk Management and Corporate Social Responsibility: The Moderating Role of Real Earnings Management

Document Type : Original Article

Authors

• Gholamreza Farsidoost ¹
• Mehdi Moradi ²
• Abolfazl Soleimani ³

¹ MSc. Of Accounting, Imam Reza International University, Mashhad, Iran.

² Professor, Accounting Department, Ferdowsi University of Mashhad, Mashhad, Iran

³ MSc. Of Auditing, Faculty of management, University of Tehran, Tehran, Iran.

https://doi.org/10.22067/tmj.2023.81222.1404

Abstract

1- INTRODUCTION
Companies operate in an environment where the public expects them, in addition to their ability to generate profits, to maintain a balance between business growth and social progress. Therefore, corporate social responsibility has become an inevitable priority for business leaders. Furthermore, the activities of companies are different in terms of the degree of risk-taking, and thus, risk management is of great concern for them in dynamic global environments. Organizational risk management pays special attention to more effective identification of risks and social communication of the company. Also, to reduce the effects of uncertainty on the company's performance, managers can manage profit within a framework of accounting standards by affecting the structure of actual transactions and maintaining the stock price and support of their shareholders. But what the general investors understand about social responsibility is to report the companies' financial issues transparently.
 
2- THEORETICAL FRAMEWORK
As a ranking factor instead of internal control, risk management targets the companies' strategy to manage their attitude and exposure to risk and increase their value. Theoretically, a manager's trust or willingness to participate in social responsibility relates to corporate governance and the company's executive motivations. Social responsibility is morally optional rather than morally required, and the risk management model strengthens a manager's economic incentive to allocate some company resources to social responsibility activities. The agency perspective of social responsibility argues that entrenched managers in a company with strong corporate governance may use social responsibility activities to collude with shareholders to gain higher management authority to benefit from personal interests. In other situations, managers who are ascertained of positive benefits from these activities may choose social investments even if they are not value-adding. Factors such as capital market pressure, product market competition, and job-related incentives can motivate managers to perform earnings management. When the company has more effective organizational risk management, it has more potential opportunities, so managers may be less willing to manipulate profits. Managers use actual earnings management more when the risk management system is relatively weak. Some managers believe that social responsibility can reduce the possibility of disclosure of companies' participation in earnings management by providing the interests of the beneficiaries and presenting an image of social and environmental concerns. Earnings management practices harm the collective interests of stakeholders. Hence, the managers who manipulate the profit can address the activism and vigilance of the stakeholders through social responsibility methods.
 
3- METHODOLOGY
This research is a quantitative study. Its strategy is multiple linear regression and moderated regression analyses based on panel data. Needed data was gathered from 102 companies admitted to the Tehran Stock Exchange (TSE) from 2015 to 2021. Eviews software (version 12) was used to analyze the data.
 
4- RESULTS & DISCUSSION
The results show that the variable of organizational risk management has a positive and significant effect on the variable of corporate social responsibility. This result may be because risk management leads managers to social responsibility activities by creating a top-down view and guiding future harmful risks from society that may take the company off the track of success. Also, the interactive variable of actual earnings management with organizational risk management has a positive and significant effect on the variable of corporate social responsibility. The interaction of real earnings management strategy with risk management provides the necessary platform through increasing short-term productivity and consequently removing the managers' concern about maintaining their position and interests, encouraging them to carry out socially valuable activities with future benefits.
 
5- CONCLUSIONS & SUGGESTIONS
Effective organizational risk management can reduce the effects of individual and general risks on the company's social responsibility goals. Companies with more effective risk management are more willing to invest in humanitarian activities. Also, actual earnings management can affect organizational risk management preferences that are applied to increase social responsibility activities. Our results have critical strategic implications for stakeholders and regulators regarding managerial opportunism and corporate governance mechanisms. Managers should focus more on organizational risk management and actual earnings management in the framework of accounting standards to maintain a sustainable competitive advantage.

Keywords

• Corporate Social Responsibility
• Risk Management
• Real Earnings Management

References

References

Abbasi, A.; Zandilak, M., & Khalifeh, M. (2016). The effect of corporate social responsibility on brand trust and brand preference with the mediating role of perceived quality and brand value. Journal of Business Management Perspective, 14(25), 31-44. (in Persian)

Ahmadzadeh, M. A.; Moradi, M., & Mostaghimi, M. R. (2022). Strategic agility model based on customers' behavioral tendencies in the insurance industry. Transformation Management Journal, 14(1). (in Persian)

Andersen, T.J. (2006). Global Derivatives: A Strategic Risk Management Perspective. PearsonEducation, Harlow.

Arefmanesh, Z.; Arefmanesh, Z., & Shokohi, H. (2022). Firm Risk Management and Firm Performance by the Role of Competitive Advantage and Financial Literacy. Financial Accounting and Auditing Research, 14(54), 79-100. (in Persian)

Aribi, A., & Gao, S. (2010). Corporate social responsibility disclosure. Journal of Financial Reporting and Accounting, 8(2), 72-91.

Asgarnezhad Nouri, B., & Emkani, P. (2017). The Effect of Risk Management on Financial Performance of the Companies Listed in Tehran Stock Exchange: The Mediating Role of Intellectual Capital and Financial Leverage. Journal of Asset Management and Financing, 5(2), 93-112. (in Persian)

Atkins, B. (2006). Is Corporate Social Responsibility Responsible? NACD Directorship, 32(10), 33-33.

Bardos, K. S.; Ertugrul, M., & Gao, L. S. (2020). Corporate Social Responsibility, Product Market Perception, and Firm Value. Journal of Corporate Finance, 62, 101588.

Barnea, A., & Rubin, A. (2010). Corporate Social Responsibility as a Conflict between Shareholders. Journal of Business Ethics, 97(1), 71-86.

Bavarsad, B.; Jaldani, S., & Ghezelbash, H. (2022). Investigating the mediating role of social entrepreneurship for social and human capital to affect operational performance. Transformation Management Journal, 13(2), 157-184. (in Persian)

Beasley, M. S.; Clune, R., & Hermanson, D, R. (2005). Enterprise Risk Management: An Empirical Analysis of Factors Associated with the Extent of Implementation. Journal of Accounting and Public Policy, 24(6), 521-531.

Becchetti, L.; Ciciretti, R., & Hasan, I. (2015). Corporate Social Responsibility, Stakeholder Risk, and Idiosyncratic Volatility. Journal of Corporate Finance, 35, 297-309.

Bergstresser, D., & Philippon, T. (2006). CEO incentives and earnings management. Journal of financial economics, 80(3), 511-529.

Borghesi, R.; Houston, J. F., & Naranjo, A. (2014). Corporate Socially Responsible Investments: CEO Altruism, Reputation, and Shareholder Interests. Journal of Corporate Finance, 26, 64-181.

Branco, M. C., & Rodrigues, L. L. (2006). Corporate Social Responsibility and Resource-Based Perspectives. Journal of Business Ethics, 69(2), 111-132.

Carroll, A. B. (1979). A Three-Dimensional Conceptual Model of Corporate Social Performance. Academy of Management Review, 4, 497-505.

Cheng, B.; Ioannou, I., & Serafeim, G. (2014). Corporate Social Responsibility and Access to Finance. Strategic Management Journal, 35(1), 1-23.

Cheng, I. H.; Hong, H. G. & Shue, K. (2012). Do Managers Do Good with Other People's Money? National Bureau of Economic Research, Working paper, 19432.

Cheung, A. W. K. (2016). Corporate Social Responsibility and Corporate Cash Holdings. Journal of Corporate Finance, 37, 412-430.

Chih, H.; Shen, C., & Kang, F. (2008). Corporate Social Responsibility, Investor Protection, and Earnings Management: Some international evidence. Journal of Business Ethics, 79(1-2), 179-198.

Cohen, D. A., & Zarowin, P. (2010). Accrual-based and Real Earnings Management Activities around Seasoned Equity Offerings. Journal of Accounting and Economics, 50(1), 2-19.

Darabi, R.; Vaghfi, S. H., & Salmanian, M. (2017). Relationship between social responsibility reporting with company value and risk for companies registered in Tehran Stock Exchange.  Journal of Value & Behavioral Accounting, 1(2), 193-213. (in Persian)

Delmas, M.; Montes-Sancho, M. J., & Shimshack, J. P. (2010). Information Disclosure Policies: Evidence from the Electricity Industry. Economic Inquiry, 48(2), 483-498.

Dhaliwal, D.; Li, O.; Tsang, A., & Yang, Y. (2011). Voluntary Nonfinancial Disclosure and Cost of Equity Capital: The Initiation of Corporate Social Responsibility Reporting. Accounting Review, 86(1), 59-100.

Ewert, R., & Wagenhofer, A. (2005). Economic Effects of Tightening Accounting Standards to Restrict Earnings Management, The Accounting Review, 80(4), 1101-1124.

Fakhari, H.; Mohammadi, J., & Hasannataj Kordi, M. (2015). An Investigation of the Audit Committee Characteristics Effects on Real Earnings Management. Empirical Studies in Financial Accounting, 12(46), 130-154. (in Persian)

Godfrey, P. C. (2005). The Relationship between Corporate Philanthropy and Shareholder Wealth: A Risk Management Perspective. Academy of Management Review, 30(4), 777-798.

Gordon, L. A.; Loeb, M, P., & Tseng, C. Y. (2009). Enterprise Risk Management and Firm Performance: A Contingency Perspective. Journal of Accounting and Public Policy, 28(4), 301-327.

Graham, J. R.; Harvey, C. R. & Rajgopal, S. (2005). The Economic Implications of Corporate Financial Reporting. Journal of Accounting and Economics, 40(1-3), 3-73.

Grewal, J.; Riedl, E. J., & Serafeim, G. (2019). Market Reaction to Mandatory Nonfinancial Disclosure. Management Science, 65(7), 3061-3084.

Habibzadeh, A., & Joyaee, R. (2020). Financial distress, internal control and profit management. Journal of Accounting and Management Vision, 3(29), 98-112. (in Persian)

Hall, B. J., & Liebman, J. B. (1998). Are CEOs Really Paid Like Bureaucrats? Quarterly Journal of Economics, 113(3), 653-691.

Harjoto, M., & Laksmana, I. (2018). The Impact of Corporate Social Responsibility on Risk Taking and Firm Value. Journal of Business Ethics, 151(2), 353-373.

Harner, M. M., (2010). Ignoring the Writing on the Wall: The Role of Enterprise Risk Management in the Economic Crisis. Journal of Business and Technology Law, 5(1), 45-58.

Hassas Yeganeh, Y.; Sohrabi, H., & Ghavasikenari, M. (2020). The relationship between social responsibility reporting and firm value. Financial Accounting and Auditing Research, 12(45), 1-20. (in Persian)

Healy, P. M., & Wahlen, J. M. (1999). A review of the earnings management literature and its implications for standard setting. Accounting Horizons, 13(4), 365–383.

Hemingway, C., & Maclagan, P. (2004). Managers’ Personal Values as Drivers of Corporate Social Responsibility. Journal of Business Ethics, 50(1), 33-44.

Homayoni Rad, M. H., & Lagzian, M.  (2015). The Employee-Organization Relationship and Organizational Citizenship Behavior. Transformation Management Journal, 7(13), 71-94. (in Persian)

Hsieh, T. S.; Bedard, J. C. & Johnstone, K. M. (2014). CEO Overconfidence and Earnings Management. Journal of Business Finance and Accounting, 41(9-10), 1243-1268.

Jalili, S., & Gheysari, F. (2014). Investigating the relationship between profit quality and social responsibility of companies listed on the Tehran Stock Exchange. Journal of audit science. 14(57), 147-170. (In Persian)

Kaveh, M., & Salemi, G. (2022). The relationship between corporate social responsibility, organizational risk management and real profit management with the moderating role of managerial self-confidence. Journal of Accounting and Management Vision, 5(58), 127-147. (in Persian)

Kim, Y.; Park, M. S., & Wier, B. (2012). Is Earnings Quality Associated with Corporate Social Responsibility? The Accounting Review, 87(3), 761-796.

Kuo, Y. F.; Lin, Y. M., & Chien, H. F. (2021). Corporate Social Responsibility, Enterprise Risk Management, and Real Earnings Management: Evidence from Managerial Confidence, Finance Research Letters, 41(101805), 1-51

Kytle, B., & Ruggie, J. G. (2005). Corporate Social Responsibility as Risk Management: A Model for Multinationals. Corporate Social Responsibility Initiative, Harvard University, Working Paper, 10.

Maranjory, M., & Alikhani, R. (2014). Social Responsibility Disclosure and Corporate Governance. Accounting and Auditing Review, 21(3), 329-348. (in Persian)

McWilliams, A.; Siegel, D. S., & Wright, P. M. (2006). Corporate Social Responsibility: Strategic Implications. Journal of Management Studies, 43(1), 1-18.

Mohamadi, M., & Karimi Deldar, B. (2021). Investigating the Impact of Corporate Social Responsibility Indices on Risk Management Methods in Companies Listed in Tehran Stock Exchange. Journal of Accounting and Management Vision, 4(40), 65-83. (in Persian)

Mohammad Sharifi, N.; Nabavi Chashmi, S. A., & Yadollahzade Tabari, N. A. (2021). The Role of Enterprise Risk Management on Firm Performance in the Merger and Acquisition Process Using Heckman's Two-Stage Model. Financial Engineering and Portfolio Management, 12(46), 435-448. (in Persian)

Naseem, T.; Shahzad, F.; Asim, G. A., & Nawaz, F. (2020). Corporate Social Responsibility Engagement and Firm Performance in Asia Pacific: The Role of Enterprise Risk Management. Corporate Social Responsibility and Environment Management, 27(2), 501-513.

Petersen, M. A. (2009). Estimating standard errors in finance panel data sets: Comparing approaches. Review of Financial Studies, 22(1), 435–480.

Pourahmadi, M. H., & Farsad Aman Elahi, G. (2021). The Effect of Enterprise Risk Management on the Relationship between External Financing and Earnings Management. Financial Accounting and Auditing Research, 13(49), 73-96. (in Persian)

Porter, M. E., & Kramer, M. R. (2006). Strategy and Society the Link Between Competitive Advantage and Corporate Social Responsibility. Harvard Business Review, 84(12), 78-92.

Presley, T. J., & Abbott, L. J. (2013). CEO Overconfidence and the Incidence of Financial Restatement. Advances in Accounting, 29(1), 74-84.

Preston, L. E., & O’Bannon, D. P. (1997). The Corporate Social–Financial Performance Relationship: A Typology and Analysis. Business and Society, 36(4), 419-429.

Prior, D.; Surroca, J., & Tribo, J. (2008). Are Socially Responsible Managers Really Ethical? Exploring the Relationship between Earnings Management and Corporate Social Responsibility. Corporate Governance: An International Review, 16(3), 160-177.

Rastegar, M. A. (2022). The effectiveness test of customer concentration on cash holdings adjustment speed in listed companies in Tehran Stock Exchange. Financial Knowledge of Securities Analysis, 14(52), 139-156. (in Persian)

Roychowdhury, S., (2006). Earnings Management: Through Real Activities Manipulation. Journal of Accounting and Economics, 42(3), 335-370.

Sarlak, N., & Akbari, M. (2014). Relationship between Related Party Transactions and Earnings Management. Accounting and Auditing Review, 20(4), 77-92. (In Persian)

Schrand, C. M., & Zechman, S. C. (2012). Executive Overconfidence and the Slippery Slope to Financial Misreporting. Journal of Accounting and Economics, 53(1), 311-329.

Shen, C. H., & Chang, Y. (2009). Ambition Versus Conscience, Does Corporate Social Responsibility Pay Off? The Application of Matching Methods. Journal of Business Ethics, 88(1), 133-153.

Torshizi, A., & Bazzaz zadeh Torbati, H. R. (2018). The Relationship Between Corporate Governance and Firm Risk: A Moderating Role of Social Responsibility. Financial Accounting Knowledge, 5(3), 135-151. (in Persian)