Determinants of Earnings Management Practice among Non-Listed Firms in the Motor Industry in Kenya

The purpose of the study was to investigate the determinants of earnings management practice among non-listed firms in the motor industry in Kenya. The study specifically sought to establish the influence of contracting motivations, presence of bonus systems, industry performance and regulatory requirements on earnings management among Non-listed firms in the Motor Industry in Kenya. The study review was based on three theories that is the prospect theory, stake holders theory and the big bath theory which are relevant to the study. This study employed a descriptive research design. A census was conducted on all the 38 motor companies registered by Kenya Motor Industry Association (KMIA) as at 2015. A multiple linear regression model was used to test the significance of the selected determinants of the earnings management practice in motor industry in Kenya. The study findings indicated that contracting motivations, presence of a bonus system and regulatory requirements were positively related to earnings management while industrial performance was negatively related to earnings management. The study recommends that companies should relook at their contracts both internal and external so as to avoid a case where contractual motivations lead to earnings management. The contracts involving senior management tenure as well as bonus contract should be balanced well so as not to lead to earnings management. The study also recommends that motor companies should take note of a proper balance between availing bonuses and compromising performance since bonus structures such as the compensation of senior management attached to performance and private control benefits of senior management can lead to the pressure to engage in earnings management. Furthermore, the management should not put too much pressure on employees to perform since it may lead to earnings management. The market and industry regulators like capital market authority should also not put too strict requirements especially on taxing and accounting principles since that may lead to earnings management in the sector.