Influence of corporate governance structures on profit management applications of businesses: An implementation on ISE (Istanbul stock exchange)

The large amount of economic loss due to the recent accounting scandals caused the quality of financial reports of businesses get questioned. The profit management practices applied by managers in order to decrease or increase the profits within the framework of the legal accounting regulations help them report unreal profits. This causes the shareholders make wrong decisions, and also prevents effective use of resources in both micro and macro terms thus resulting in economic loss. In literature there are findings proving that the understanding of corporate governance decreases the profit management applications and increases the quality of financial reporting. This study aims at determining whether the corporate governance factors are effective on the profit management applications in Turkey and those corporate governance factors that limit the profit management applications. Moreover among the models in literature the one that best measures the profit management applications of businesses in Turkey will be determined.To this end in the application part of this doctoral dissertation first of all moving from the total assessments, the arbitrary assessments that are accepted as the indicator of the profit management applications were calculated. In this calculation different models used in literature in order to measure the profit management applications were employed and the model that statistically best calculates the profit managements in Turkey was determined. With this model the profit management applications were measured and the relationship between the profit management applications and corporate governance was analyzed. Corporate governance was measured under three main titles: board of directors, audit committee and proprietary structure. Thus the corporate governance factors that affect and limit the profit management applications were determined. Moreover in this study the relationship between the profit management applications and corporate governance was evaluated in terms of the aims of the profit management applications (income increasing and income decreasing) and independent audit quality.The 625 business- year data of 125 businesses registered at İstanbul Stock Exchange between the years 2006-2010 were collected from the activity and Corporate Governance Compliance Reports of each business. In determination of the model that best measures the profit management applications the Jones, Modified Jones, Kothari and Larcker Richardson Model were taken as the basis because they are the most frequently used models in literature. These models were estimated using the Ordinary Least Squares-OLS method and with Analysis of Balanced Panel Data. As a result among these models the one that best measures the profit management applications in Turkey within the referred sampling period was determined to be the Larcker Richardson Model. In the analysis of profit management applications and corporate governance the Generalized Least Squares- GLS technique was used. For the main sampling group Balanced, for the subsample groups (those which employ income increasing, income decreasing profit management applications, the businesses which are audited by the biggest four independent audit institutes and those that are not) the Unbalanced panel data analysis was used.As a result of the analysis the corporate management factors that increase profit management applications in businesses were determined as block ownership and administrative ownership beside board of directors and audit committee size. The corporate management factors that decrease profit management applications in businesses were determined as the independence of the board of directors and the audit committee. Moreover it was determined that in Turkey the profit management applications are used in order to decrease income though with a tiny difference. In order to prevent the profit management applications in businesses the number of independent members in the board of directors and audit committee should be increased, besides; activities aimed at increasing the quality of management and decreasing block ownership should be focused on.Keywords: Earnings Management, Corporate Governance