Earnings management in the mining industry
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School of Business | Master's thesis
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AbstractEarnings management refers to management's intentional discretion on managing accounting information or real life decisions as a purpose to mislead company's stakeholders. Earnings can be misstated due to managers' own incentives or with the objective of maximizing the wealth of a company. Earnings management literature aims to explain why managers manipulate earnings, how they do so and what the consequences of this behavior are. This thesis studies these key questions and aims at finding answers to them in regard to the mining industry. Mining is truly global with operations spread amongst a wide range of global locations. Shares of mining companies dominate in many stock exchange and as such are an integral part of the financial system. In turn, mining companies have an urge for funds: exploration activities for finding economically viable and technically feasible mineral resources take years, require substantial capital and must bear economic downturns. Accounting for mining activities presents many challenges. Significant upfront investments, uncertainty over prospects or mineral resources and long project lives create difficulties and requires discretion and judgment by the company's management. The most significant source of value for mining entities are mineral reserves and resources - together with the mining company's ability to transform mineral resources into cash flows. A variety of accounting approaches and policies is developed by mining companies. However, there is an increasing trend in adopting IFRSs in the industry. A single set of high quality, globally understandable accounting standards helps mining companies in communicating on a transparent and globally consistent way and meeting their need for capital. Regardless of the fact that mining companies compile financial statements according to IFRSs, they possess various positions for management to pursue discretion in preparing financial statements. There are no disclosure requirements for mineral resources under IFRS and it is not mandatory to provide disclosures in all jurisdictions. Some entities still choose to disclose their reserves and resources on a voluntary basis. This thesis has provided further understanding in earnings management in the mining industry, especially regarding incentives to engage with earnings management activities and the tools that management may use for managing earnings. The main motivation for managing earnings in the mining industry lies in capital market reasons due to the high capital-dependency of the industry. The study has further confirmed the need for IFRS guidance among extractive industries and the fact that the reporting of mineral resources should be linked to financial reporting standards. The connection between IFRSs and a reporting code for mineral resources would finally uniform the true value of a mining company and financial reporting quality, and therefore is promoted from the perspective of this study.
earnings management, IFRS, mining industry, mineral resources