Quest Journals Journal of Research in Business and Management Volume 5 ~ Issue 3 (2017) pp: 01-08 ISSN(Online) : 2347-3002 www.questjournals.org *Corresponding Author: Clement C. M. Ajekwe 1 1 | Page Research Paper Accounting Flexibility and Earnings Management: Evidence from Quoted Real Sector Firms in Nigeria Clement C. M. Ajekwe, Adzor Ibiamke Received 25 May, 2017; Accepted 15 June, 2017 © The author(s) 2017. Published with open access at www.questjournals.org Abstract: We ascertain the extent to which management use of accounting flexibility (estimates, fair values and judgment and discretion) are associated with earnings management by listed companies in Nigeria. Based on the study objectives, an ex post facto descriptive design was adopted; descriptive statistics, multiple linear regressions and independent t-tests were used to analyse data and ascertain the association of accounting flexibility elements with the absolute discretionary accrual values (used as proxy for earnings management). The study found that there is a positive significant relationship between the use of estimates and earnings management. The relationship between judgment and discretion in the annual reports was found to be insignificantly positive with earnings management. It was also found that there was inverse insignificant relationship between the use of fair values and earnings management. The study concluded that flexibility in accounting exists because circumstances and conditions across companies and industries vary. It is recommended therefore, that corporate regulators continue to ensure that every reporting entity fully discloses the critical estimates and judgments (including fair value estimations) that underlie its financial reporting. This is absolutely necessary if users are to assess how flexibility in accounting has been invoked in the published financial statements. Keywords: Accounting flexibility, earnings management, estimates, judgement, fair value I. INTRODUCTION Existing literature provides evidence that managers strategically intervene in the financial reporting process to report their desired earnings numbers (Burgstahler & Dichev, 1997). Managers can intentionally intervene in the financial reporting process either through flexibilities contained in the accounting standards or by structuring the real operating transactions in a manner that can alter the true income. A vast body of literature exists in accounting to justify why management does this (Bens, Nagar, & Wong, 2003; Hribar, Jenkins, & Johnson, 2006; Taylor & Xu, 2012, among others). Since accruals management does not consume cash, it is less costly and presumably preferable to manipulation of the underlying business activities. One way of managing accrual is through flexibilities enshrined in the principles-based accounting standards. Principles-based accounting standards, such as the International Financial Reporting Standards (IFRS) and the now discarded Nigerian Statements of Accounting Standards (SAS) allow financial statement preparers significant latitude, flexibility or “subjectivity” in the recording of transactions, and the preparation and presentation of financial statements. Flexibility in accounting is based on the idea that as a company changes, its accounting should also to able to change and to adapt to its needs, operations and management. In other words, as explained by Mulford and Comiskey (2002), flexibility in accounting is a mechanism to cope with changing circumstances and variations in the conditions across companies and between industries. However, for a long time, firms have been known to exploit accounting flexibility to engage in earnings management (Smith, 1992; Palepu, Bernard & Healy, 1996; Levitt, 1998; Mulford & Comiskey, 2002; David. 2004; Chaoenwong & Jiroporn, 2009; Yu, Du & Sun, 2006). We investigate the association between accounting flexibility and earnings management practice by listed manufacturing companies in Nigeria. Accounting flexibility in this study is estimated through the content analysis of the following words (1) estimates, (2) fair values, (3) judgment and discretion. Limited studies have used some implied measures of accounting flexibility but to the best of our knowledge there are no studies that use this direct measure of accounting flexibility thereby making our study unique methodologically. The rest of the paper is structured as follows: literature review where the concept of accounting flexibility was operationalised along with empirical studies, the section is followed by the methodology and results of the analysis. Finally, section 5 summarises and concludes the paper.