Income Smoothing in

Shariah Compliant

Companies

An empirical

Study

Research ?

Are Managers involved in Earnings

Management practice??

Introduction•Opportunity of earnings

management is provided

to the firms by GAAP

allowing them the use

of accrual accounting.

• Theoretically present value offuture cash flows is consideredas value of the company. Thusany increase in earnings depictsthe increase in overall value ofcompany and vice versa (Lev,1989).

Review of Literature

Review of Literature• According to an estimate 8-12 percent

firms with small pre-managed earning

decreases manipulate their earnings to

give impression of earning increases.

• 30-44 percent firms with small pre-

managed losses manipulate earnings to

show positive earnings (Burgstahler,

1997).

Review of Literature

(A study of Albanian private sector firms 2013) Reported that 36 out of 75 firms managed earnings downward, which means that 52 % firms tend to enhance their profits to

avoid small losses.

O b j e c t i v e s

To find quality of earnings in Shariah Compliant

companies of Pakistan.

To compare High cap with low cap companies.

Testable statement

2009 2010 2011 2012

Automobile 8 8 9 8Textile 4 6 6 5Energy(Pet, Gas, Batt) 13 15 15 14(Che, Fert, Pha) 11 12 12 12FMCG & Sugar Mills 4 5 5 5Cement & Ceramics 13 13 13 13Other(Tele, Engg, Logistics) 12 12 12 12Total 65 71 72 69

CVΔIi / CVΔSi

Δ in salesΔ in EAT

Avg.Std. Std. Avg.

CV CV

Eckel

Index

< 1 > 1Income

Smoothing

Income

Smoothing

METHODOLOGY-ECKEL’S INDEX

METHODOLOGY-MODIFIED JONES

T o t a l A c c r u a l s

E c k e l ’ s R e s u l t s

0

10

20

30

40

50

60

70

Polled sample KMI30 Low cap

35 38 35

65 62 65

Non-Smoothers

Smoothers

0

10

20

30

40

50

60

70

80

90

100

2009 2010 2011 2012

5155

4245

4945

5855

100 100 100 100

All Companies

Upward

Downward

Total

0

10

20

30

40

50

60

70

80

90

100

2009 2010 2011 2012

6350

3325

38

50

6775

Upward

Downward

Total

Honda Atlas Cars DownwardIndus Motors Company Agri Autos Industries

Honda Atlas Cars DownwardIndus Motors Company Atlas HondaGhandara Industries Ltd

Agri Autos Industries UpwarIndus Motors CompanyHino Pak Motors

SazgarA

uto

Engg

Up

ward

AgriA

uto

s Ind

ustries

0

10

20

30

40

50

60

70

80

90

100

2009 2010 2011 2012

75 6783

60

25 3317

40

Downward

Upward

Kohenoor IndustriesDownward

Kohenoor Industries DownwardDintextile Mills

Elite Spinnign Mills Downward

DintextileDownwardIndus dyeing

2009 2010 2011 2012

69 60

2750

31 40

7350

Upward Downward

PSO DownwardExide PAKPAK RefineryAttock Petroleum

Ghani Gasses DownwardPak RefineryNational RefineryHub PowerShell PakBurshane LPG Pak

Attock Petroleum DownwardNational RefineryOGDCL

0

10

20

30

40

50

60

70

80

90

100

2009 2010 2011 2012

45

75

50 42

55

25

50 58

Upward Downward

0

10

20

30

40

50

60

70

80

90

100

2009 2010 2011 2012

75

40 40 40

25

60 60 60

Downward

Upward

Unilever upward behavior in 2009

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2009 2010 2011 2012

31 31 3154

69 69 6946

Downward

Upward

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2009 2010 2011 2012

3358 50 42

6742 50 58

Downward

Upward

• Eckel, N. (1981). The Income Smoothing Hypothesis Revisited. Abacus, 11: 28-40.

Emre E., (2011). Income Smoothing: Evidence from Turkey

• Siti Masnah et al. (2013). Income Smoothing and Islam: Evidence from Malaysian

Shariah Compliant Companies. International Journal of Social Science and

Humanity, Vol. 3, No. 2, March 2013.

• Yusarina et al. (2013). Measuring market performance of shariah compliant

companies: the relevance of earnings management and leverage. 4th international

conference on business and economic research (4th October 2013) proceeding

• Alwan Sri Kustono, (2011). The theoretical construction of income smoothing

measurement. Journal of Economics, Business and Accountancy Ventura Volume

14, No. 1, April 2011, pages 59 – 78