Accounting manipulation, corporate governance and financial performance of listed manufacturing firms in South Africa

Abstract

Accounting manipulation is widespread among organisations across the world and has been recognised as one of the most pertinent issues in the global marketplace. As a result of this increasingly pervasive practice, the academic community has been challenged to do research to identify the factors that contribute to accounting manipulation and to devise strategies that can be utilised to mitigate its effects. Regrettably, the majority of the research studies on accounting manipulation and its effects have been conducted almost entirely in developed markets. This has resulted in a significant knowledge gap about how to detect, manage, and mitigate the effects of accounting manipulation in developing countries such as South Africa. Dueto the aforementioned research geographical knowledge gap, this research investigates the influence accounting manipulation has on the financial performance of manufacturing firms listed on the Johannesburg Stock Exchange (JSE). As a result, the main aim of this study is to examine the influence of accounting manipulation on the financial performance of listed manufacturing firms in South Africa. The research further investigates the moderating effect that corporate governance has on the link between accounting manipulation and the financial performance of the firms. The manufacturing sector is a significant contributor to the economy of South Africa; hence, the focus on the companies operating within this sector. In addition, manufacturing businesses like Tongaat Hullett and Steinhoff were implicated in the manipulation of their accounting records in 2017 and 2019 respectively, which begs the question as to whether the practice of accounting manipulation is widespread in the sector. The research study employed a quantitative correlational design, utilising secondary data acquired from annual financial statements that were obtained from companies' websites, among other sources. Data was obtained from 50 listed manufacturing firms over the 2016-2022 period. A panel regression method was employed to estimate the relationship among the variables. Accounting manipulation was measured by a discresionary accrual whilst financial performance was measured using return on assets and Tobin’s Q. The findings demonstrated a negative correlation between accounting manipulation and financial performance, indicating that accounting manipulation does nt result in an improved financial performance. In addition, the evidence showed that the impact of accounting manipulation is much lessened by audit quality and board qualifications. The results imply that although short-term increases in profitability may come from profits management, over time it reduces the company’s value. Reducing these risks mostly depends on efficient corporate governance, especially with regard to audit quality and board knowledge. The findings imply that the manufacturing sector needs a more robust execution of governance frameworks and the adoption of principled financial procedures to ensure sustainable growth and transparency. It is necessary for policymakers and regulators to create and implement more stringent regulations and processes to guarantee that publicly traded corporations disclose their financial information in a manner that is more honest and ethical.