CHANGE IN EARNINGS QUALITY SURROUNDING ERP IMPLEMENTATION

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Abstract

Enterprise Resource Planning (ERP) systems have become widely adopted by companies to fulfil various purposes. ERP systems make information flow more transparent and timelier. From a capital markets perspective, an interesting question is whether the implementation of ERP systems reduces earnings management. One argument is that it will not make any difference for managers who are intent on managing earnings. In this case, managers will find ways to circumvent the constraints imposed by the new system. It may also be argued that ERP makes it easier for the auditors to detect earnings management, thus dissuading any intent on the part of managers to indulge in earnings management. Another argument is that ERP systems will provide managers with the information necessary to anticipate potential problems earlier in the period, allowing them to make operating adjustments, thereby reducing the need for earnings management through accounting accruals. We examine the question of changes in earnings management brought about by ERP system implementation using an alternate measure of earnings management and earnings quality – a firm’s likelihood of a GAAP violation. Our findings are that the probability of a GAAP violation decreases significantly after the implementation of ERP systems, but less for larger firms, and more for high growth firms.

Keywords: Earnings Management, Enterprise Resource Planning Systems, Earnings Quality, GAAP Violation, Beneish M-Score

Received: 14.02.2017

Accepted: 18.07.2017

How to cite this paper: Dehning, B., Sinha, C., & Sinha, P. (2017). Change in earnings quality surrounding ERP implementation. Corporate Ownership & Control, 15(1), 8-17. https://doi.org/10.22495/cocv15i1art1