Earnings Management Ethicality and Application in the Kenyan Public Sector: A Critical Review

Abstract

Abstract Purpose The purpose of this study was to critically review various empirical literature in regard to earnings management ethicality and its application in public sector organizations in the Kenyan context with the aim of identifying the gaps and areas for further research. Methodology: The study applied a semi-systematic or narrative review approach by relying on previous publications (2008–2022) on the topic under discussion. This current study applied thematic/content analysis to form opinions about the deductions from the study. Findings: Results shows key motivators toward earnings management to include; managers engaging in earnings management as a result of being sure of not being observed or detected by the public, avoiding reporting losses or avoiding showing any decreases in the reported earnings, meeting analyst forecasts, avoiding payment of higher taxes, to enable access to debt, contracting motivations, and to achieve bonuses tied to performance. Moreover, findings had it that there is no consensus in regard to the ethicality of earnings management. Hence legitimate and illegitimate management of earnings. The study also evidenced that both accrual and real earnings management techniques are applied by managers in the company’s economic reports. Additionally, there are mixed results as to whether creative accounting is practiced in the public sector or not, and with reference to Kenya, no studies on earnings management ethicality has ever been conducted. Implications: The findings from the many empirical studies reviewed herein are therefore helpful in addressing the research gaps identified. Therefore being the limited research on earnings management ethicality in Kenya and globally, it is recommended that scholars to still conduct further studies on earnings management and especially in the public sector firms. Value of the Study: It contributes to strategy makers like the Kenya Accounting Standards Board in the formulation and implementation of accounting principles. It also forms a basis for further research in the management of earnings and its ethicality among public sector firms. That is, no other study had been done in Kenya and just a few studies have been carried out globally.