Earnings management in the financial sector: A systematic review through the fraud diamond and Hofstede’s cultural dimensions

Abstract

Earnings management in the financial sector remains a critical issue due to its potential to mislead regulators, investors, and other stakeholders about the true financial condition and stability of financial institutions. This study examines earnings management practices in the financial sector by exploring their underlying causes, cultural influences, and commonly used tools. This study uses a Systematic Literature Review approach, with 41 selected articles based on specific inclusion criteria. The selected articles were subjected to bibliometric and descriptive analysis. The findings confirm that the elements of the fraud diamond theory are significant determinants of earnings management. Analyzed through the lens of Hofstede’s cultural dimensions, deeper cultural traits such as short-term orientation and high masculinity are found to further reinforce earnings management practices. Moreover, loan loss provisions seem to be the most common tool used for earnings management in the financial sector. This research offers insights into the implications and determinants of earnings management and how culture correlates with fraud theory. By recognizing how cultural values shape managerial behavior, more effective detection and prevention strategies for earnings manipulation can be developed.