The effect of anti-money laundering regulations on earnings management: evidence of Iran

Abstract

Purpose The purpose of this study is to examine the impact of anti-money laundering (AML) regulations on accrual earnings management (AEM) and real earnings management (REM) in Iran’s emerging capital market. Design/methodology/approach The panel data regression is used to testing hypotheses. The sample includes 2,020 data and 202 companies listed on the Tehran Stock Exchange (TSE) over a period of ten years from 2012 to 2021. Also, the companies covered in this study include financial and nonfinancial companies. Furthermore, the data related to the research variables were extracted from the annual financial statements and the TSE database. Findings The results show that compliance with AML regulations leads to a reduction in AEM and REM. In other words, companies with higher money laundering (ML) tend to manage their earnings, which is in line with agency theory. Practical implications This study has implication for policymakers and regulators, auditors and managers. Considering the negative impact of AML regulations on earnings management (EM), Iranian auditing firms need to emphasize on the full implementation of AML regulations in TSE. Also, the results of this research may aid policymakers and regulators to detect financial crimes through accounting signals. Originality/value To the best of the authors’ knowledge, this is the first study in an Iran capital market to examine the impact of AML regulations on EM in financial and nonfinancial companies. Previous research has not controlled for the effects of financial companies. Prior studies have not examined the effects of financial companies. In addition, this study differentiates itself from previous studies by introducing a new method for measuring the independent ML variable based on auditor opinions. The obtained data can aid international bodies to better understand compliance with ML regulations in Iran and can reduce their concerns in negotiations.