The Relationship between Governance and Earnings Management: An Advanced Empirical Study of Non-profit Hospitals in Taiwan

Abstract

In response to criticism regarding the financial information of nonprofit proprietary hospitals in Taiwan, the Taiwan Department of Health (February 2006) established standards for the financial reports of medical-juridical persons. These guidelines stipulate that such reports must be audited by a certified public accountant to verify that the reported earnings are representative. However, nonprofit proprietary hospitals continue to transfer hospital profits to individuals or corporate groups by using diverse measures, indicating that earnings figures may not reflect operational performance. Therefore, this study investigated nonprofit proprietary hospitals in Taiwan and applied the logistic regression method to examine earnings management (EM) behavior. The empirical results showed that the governance index exhibited a negative correlation with discretionary accruals of bad debt, discretionary accruals of the Jones model, and discretionary accruals of non-operating or non-revenue-generating activity. Nevertheless, discretionary items play an active role in EM. Discretionary accruals of non-operating or non-revenue-generating activity possessed relatively strong explanatory power.