Internal control quality and earnings management. Lessons from microfinance institutions

Hubert Tchakoute Tchuigoua, Damaris Ning Mufur and Magloire Tchatchoua Nya

International Journal of Banking, Accounting and Finance, 2024, vol. 14, issue 3, 347-369

Abstract: This study examines the effect of internal control quality on the earnings quality of microfinance institutions (MFIs). Our analysis is based on an unbalanced sample of 374 ratings reports produced by Planet Rating over the period 2001 to 2012. Given that the cross-sectional dimension is dominant in our observations, we pooled the data and controlled for year-fixed effects. To check for the consistency of our results, we re-estimated our baseline model after controlling for the endogeneity of internal control quality (self-selection bias) and including additional control variables. The results reveal a significant negative association between internal control quality and abnormal loan loss provisions (ALLP) suggesting that setting-up sound internal control mechanisms limit discretion in reporting provisions and thus improves earnings quality.

Keywords: internal control quality; agency problems; earnings management; loan loss provisions; microfinance institutions; MFIs. (search for similar items in EconPapers)
Date: 2024
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