This document discusses research into income smoothing practices among Shariah compliant companies in Pakistan. It provides literature reviewing studies that found evidence of income smoothing, where companies manipulate earnings to avoid reporting losses or small decreases in earnings. The document outlines the objectives of analyzing the quality of earnings reported by Shariah compliant Pakistani companies and comparing practices between high and low market cap firms. It then describes the methodology to use Eckel's Index and modified Jones model to measure income smoothing behavior based on volatility of earnings and sales figures. Results will be analyzed between polished sample and KMI30 index as well as individual sector trends over 2009-2012.

2. Income Smoothing in
Shariah Compliant
Companies
An empirical
Study

3. Research ?
Are Managers involved
in Earnings
Management practice?
?

4. Introduction
•Opportunity of earnings
management is provided
to the firms by GAAP
allowing them the use
of accrual accounting.

5. • Theoretically present value of
future cash flows is considered
as value of the company. Thus
any increase in earnings depicts
the increase in overall value of
company and vice versa (Lev,
1989).
Review of Literature

6. Review of Literature
• According to an estimate 8-12 percent
firms with small pre-managed earning
decreases manipulate their earnings to
give impression of earning increases.
• 30-44 percent firms with small pre-
managed losses manipulate earnings to
show positive earnings (Burgstahler,
1997).

7. Review of Literature
(A study of Albanian
private sector firms 2013)
Reported that 36 out of 75
firms managed earnings
downward, which means
that 52 % firms tend to
enhance their profits to
avoid small losses.

8. O b j e c t i v e s
To find quality of earnings
in Shariah Compliant
companies of Pakistan.
To compare High cap
with low cap
companies.

9. Testable statement

10. 2009 2010 2011 2012
Automobile
8 8 9 8
Textile
4 6 6 5
Energy(Pet, Gas, Batt)
13 15 15 14
(Che, Fert, Pha)
11 12 12 12
FMCG & Sugar Mills
4 5 5 5
Cement & Ceramics
13 13 13 13
Other(Tele, Engg, Logistics)
12 12 12 12
Total
65 71 72 69

11. CVΔIi / CVΔSi
Δ in salesΔ in EAT
Avg.Std. Std. Avg.
CV CV
Eckel
Index
< 1 > 1
Income
Smoothing
Income
Smoothing
METHODOLOGY-ECKEL’S INDEX

12. METHODOLOGY-MODIFIED JONES

13. T o t a l A c c r u a l s

14. E c k e l ’ s R e s u l t s
0
10
20
30
40
50
60
70
Polled sample KMI30 Low cap
35 38 35
65 62 65
Non-Smoothers
Smoothers

15. 0
10
20
30
40
50
60
70
80
90
100
2009 2010 2011 2012
51
55
42
45
49
45
58
55
100 100 100 100
All Companies
Upward
Downward
Total

16. 0
10
20
30
40
50
60
70
80
90
100
2009 2010 2011 2012
63
50
33
25
38
50
67
75
Upward
Downward
Total
Honda Atlas Cars Downward
Indus Motors Company
Agri Autos Industries
Honda Atlas Cars Downward
Indus Motors Company
Atlas Honda
Ghandara Industries Ltd
Agri Autos Industries Upwar
Indus Motors Company
Hino Pak Motors
SazgarAutoEnggUpward
AgriAutosIndustries

17. 0
10
20
30
40
50
60
70
80
90
100
2009 2010 2011 2012
75 67
83
60
25 33
17
40
Downward
Upward
Kohenoor Industries
Downward
Kohenoor Industries
Downward
Dintextile Mills
Elite Spinnign Mills
Downward
DintextileDownward
Indus dyeing

18. 2009 2010 2011 2012
69 60
27
50
31 40
73
50
Upward Downward
PSO Downward
Exide PAK
PAK Refinery
Attock Petroleum
Ghani Gasses Downward
Pak Refinery
National Refinery
Hub Power
Shell Pak
Burshane LPG Pak
Attock Petroleum Downward
National Refinery
OGDCL

19. 0
10
20
30
40
50
60
70
80
90
100
2009 2010 2011 2012
45
75
50 42
55
25
50 58
Upward Downward

20. 0
10
20
30
40
50
60
70
80
90
100
2009 2010 2011 2012
75
40 40 40
25
60 60 60
Downward
Upward
Unilever upward behavior in 2009

21. 0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2009 2010 2011 2012
31 31 31
54
69 69 69
46
Downward
Upward

22. 0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2009 2010 2011 2012
33
58 50 42
67
42 50 58
Downward
Upward

23. • Eckel, N. (1981). The Income Smoothing Hypothesis Revisited. Abacus, 11: 28-40.
Emre E., (2011). Income Smoothing: Evidence from Turkey
• Siti Masnah et al. (2013). Income Smoothing and Islam: Evidence from Malaysian
Shariah Compliant Companies. International Journal of Social Science and
Humanity, Vol. 3, No. 2, March 2013.
• Yusarina et al. (2013). Measuring market performance of shariah compliant
companies: the relevance of earnings management and leverage. 4th international
conference on business and economic research (4th October 2013) proceeding
• Alwan Sri Kustono, (2011). The theoretical construction of income smoothing
measurement. Journal of Economics, Business and Accountancy Ventura Volume
14, No. 1, April 2011, pages 59 – 78