BACKGROUND : Enron was considered a strong corporate social performer when their infamous
accounting scandal emerged in 2000. Literature suggests that companies use corporate social
responsibility (CSR) to disguise corporate misconduct.
AIM AND SETTING : This study examines one type of corporate misconduct, namely, earnings
management (EM). Prior studies have found significant associations between CSR performance
and EM; however, none of these studies controlled for CSR disclosure. This study unbundles
the effects of CSR performance and CSR disclosure on EM. To examine the relationship
between CSR performance and CSR disclosures and EM of listed South African companies.
METHODS : A company included on the Socially Responsible Investment (SRI)1 index is used as
an indicator of CSR performance. Four measures of CSR disclosure are used.
RESULTS AND CONCLUSION : The study tests both CSR performance and CSR disclosure against
both real earnings management (REM) and accrual-based earnings management (AEM). CSR
performance and earnings management: Companies with better CSR performance were more
likely to engage in EM through income increasing discretionary accruals. This suggests that
managers who inflate earnings may engage in CSR activities to avoid unwanted scrutiny from
stakeholders. Companies with better CSR performance were less likely to engage in REM,
suggesting that managers with better CSR performance regard the management of earnings
through accruals that reverse in the next period less incriminating than managing earnings
through actual company resources. CSR disclosure and earnings management: Companies that
integrated their CSR disclosures more into their annual report engaged less in income
decreasing discretionary accruals, suggesting that managers with incentives to make more
CSR disclosures to reduce information asymmetry will also be less inclined to manage earnings.
L.A.J. (University of South Africa) was responsible for
generating the idea, gathering the data, performing the
analyses, concluding and writing the article. M.D.K.
(University of Pretoria) and C.J.D.V. (University of Auckland,
New Zealand and University of Pretoria) were involved in
providing guidance throughout the process.