CHAPTER ONE INTRODUCTION

1.1       Background to the study

The financial scandals that rocked the UK and the USA towards the end of the 1990s and the

beginning of the 21st century have brought about a major awareness on the need for more

transparency and credibility in order to protect shareholders and stakeholders alike. Earnings

management, which has always been the phenomenon at the core of these scandals, has received

considerable attention in accounting literature because it has been a consistent cause of concern

among practitioners and regulators, and has become one of the most important challenges

confronting corporate governance mechanisms in trying to resolve the negative impact of

earnings management on financial reporting.

The practice of earnings management involves altering the earnings figures being reported,

through the use of the judgmental discretions as allowed by the generally accepted accounting