Earnings management and the role of MOSAL in co-ops

Abstract

This study provides evidence that consumer co-operative societies (co-ops) drive reported earnings toward zero profit by adjusting sales, discretionary expenses, and costs of goods sold. Evidence also indicates that co-ops with small losses manage earnings up to avoid reporting losses and make small profits. Furthermore, earnings management tends to decrease after the 2013 MOSAL (Ministry of Social Affairs and Labor) regulation. This paper examines a highly significant and currently unresearched segment of the economy using a unique and comprehensive dataset of annual information on Kuwaiti co-ops. It also provides new insights on the role of government regulations in curbing the accounting practices co-ops managers use to misreport financial statements.