Although small and medium-sized enterprises (SMEs) are represented on a large scale around the world, the literature on earnings management (EM) has focused mainly on listed firms. In this sense, this chapter provides important insights on the determinants and main incentives for EM in the context of Portuguese and Spanish SMEs, over a period of 10 years, also considering two relevant macroeconomic events (financial crisis and entry into force of harmonized accounting regulations). The results obtained are similar for both countries and are intended to underline the possible positive effects of reducing these practices after the entry into force of a harmonized accounting standard with the International Accounting Standards Board (IASB) standards and also to warn against the possible negative effects of managers' opportunistic behavior during a period of financial crisis. The close association between accounting and taxation, since the calculation of the tax income depends partly on the accounting income, remains an incentive to engage in EM practices.
TopIntroduction
In the endless world of research on earnings management (EM), much has already been written about various topics: several authors have focused on the concept and its legality (e.g. Healy & Wahlen, 1999; Howard, 1996; Naser, 1993; Schipper, 1989; Skinner & Dechow, 2000), some aimed to detect EM (e.g. Beneish, 1997; Burgstahler & Dichev, 1997; Healy, 1985; Jones, 1991), others focused on their incentives (e.g. Dechow & Schrand, 2004; Healy & Wahlen, 1999; Othman & Zeghal, 2006; Sweeney, 1994; Watts & Zimmerman, 1978), others researched the effect of several variables, such as Anglo-Saxon vs Continental countries (e.g. Ball & Shivakumar, 2005; Lisboa & Kacharava, 2018; Othman & Zeghal, 2006). Other authors addressed post accounting regulation change (e.g. Ames, 2013; Christensen, Lee, Walker, & Zeng, 2015; E.Dimitropoulos, Asteriou, Dimitrios Kousenidis, & Leventis, 2013; Karampinis & Hevas, 2013; Păşcan, 2015; Pereira & Alves, 2017; Zeghal, Chtourou, & Fourati, 2012), and financial crisis (e.g. Argilés-Bosch, García-Blandón, & Martínez-Blasco, 2012; Cimini, 2015; Kousenidis, Ladas, & Negakis, 2013; Lisboa, 2017; Lisboa & Kacharava, 2018; Persakis & Iatridis, 2015), among others.
The common factor of all prior research is the sample. These studies are focused in EM that occurs in listed firms. However, the question that arises is: in smaller private firms (therefore, non-listed ones) is there an absence of EM? Is not it important to study them? Around the world, small and medium-sized enterprises (SMEs) come to represent more than 95% of firms worldwide and more than 65% of employment (Bonito & Pais, 2018). In this way, the SMEs sector is the most crucial sector and the backbone of many developed and developing economies around the world (Alp & Ustundag, 2009; Perera & Chand, 2015). Even though in both the EU and the US economies these firms have no value (Allee & Yohn, 2009), in other countries, such as Portugal and Spain, private SMEs represent 99.9% of their business environment and, for that reason, their importance is higher (European Comission, 2017a, 2017b).
So, if listed firms from Portugal and Spain manage their earnings as shown by the studies of Argilés-Bosch et al. (2012) and also Pereira and Alves (2017), the authors have enough motivations to believe that non-listed SMEs also engage in these practices, although with different incentives.