The Relationship Between Earnings Management and Corporate Social Responsibility: Evidence from the UK

Abstract

The aim of the research is to investigate the relationship between the degree of corporate social responsibility (CSR) initiatives and the degree of earnings management (EM) in the UK. In accordance with the theoretical framework of the paper, earnings management was defined as a strategy to manipulate financial reports, enabling improved reporting on the company’s financial performance. The longitudinal research was conducted in order to investigate the relationship between CSR practice and the level of accounting conservatism. The research utilised a descriptive quantitative research design, based on secondary panel data collected for a period of 11 years from 2009 to 2019. The study sample was based on FTSE 350 list of the UK’s 350 largest companies, and a final sample comprised of 1,861 observations. The absolute value of current discretionary (abnormal) accruals was considered to be a dependent variable illustrating the level of earnings management implemented in the company. In turn, the level of CSR was evaluated at the CSR score. In addition, a set of seven control variables was created, including firm size, leverage, profitability, firm growth, market to book ratio, ICB industry code, and year dummies. A dynamic linear regression model was developed to illustrate the effect of independent and control variables on the accounting conservatism. The empirical result of the analysed secondary data led to the conclusion that CSR initiatives implemented by UK companies is related to earnings management practice. These findings are inconsistent with the estimated outcomes since, on the basis of the critical literature review analysis, it was expected that companies with a higher degree of social responsibility would also demonstrate a higher level of accounting conservatism. The study is important for policymakers in understanding firms’ involvement in CSR practices while analysing their organisational financial reporting.