Measurement of Income Smoothing and Its Effect on Accounting Conservatism: An Empirical Study of Listed Companies in the Iraqi Stock Exchange

Headnote

ABSTRACT

Income smoothing and accounting conservatism as subjects in accounting are of great importance as they cover many important topics. Reduction in the variance of net profits from one period to the next is achieved by many companies that use income smoothing; from year to year, profit rate are showed in an organized manner. Also, accounting conservatism is an accounting practices or important practice performed by accountants in order to include uncertainty about the possibility of making profits. This study is aimed to unfold the practices attributed to income smoothing and accounting conservatism with regards to the measures by the listed companies in the Iraqi stock exchange. The research aimed to design a statistical model to measure the impact of those practices on smoothing of accounting income under the conservatism of accounting. The research found that, companies that exercise income smoothing and accounting conservatism experience the effects of practicing smoothing income on their accounting conservatism.

JEL Classification: H24; M41; O15.

Keywords: Income Smoothing; Accounting Conservatism; Iraqi Stock Exchange.

1.INTRODUCTION

The theory of the Agency emerged a result of large size of companies and the separation of ownership from management as an initiative to solve the problem of conflict within the relevant parties of an economic unit. The concept of smoothing income is connected with the theory of agency while the Department of Economic Unity is linked with the income in order to achieve several goals that support the practices by the management of the companies. The economic unity is favored through the manipulation and influence of the principles, standards of accounting and different methods of scientific application. The management of companies exploited the accounting principles and standards to achieve their own motives by increasing the performance of the company. The challenge in this accounting is that it does not put strict limits on management options when determining the accounting policies and procedures.

Therefore, those uncensored options will be more complex, while the simple options for those actions and policies will be the best benefit to investors. Thus, the managers' options for those accounting policies and procedures often are considerable strategy intended to meet the expectations on profits. Moreover, an accounting conservatism is a practice followed by an attempt to include uncertainty and risk inherent...