A Critical Analysis of Earnings Management: Signal Theory versus Shariah’s Primary Sources
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Abstract
Earnings management (EM) is the manipulation of financial statements through different techniques, which is considered an illegal act performed legally in conventional financial system. The aim of this study is to critically evaluate the EM which if performed by signalling from the light of Quran and Hadith (the primary sources of Shariah). Additionally this study critically examines the role of managers (emit signals for their own benefit) as Wakeel (Agent), Amin (Custodian) and Shareek (Partner) from Shariah perspective. The findings of the critical evaluation clearly reveal that EM, especially opportunistic signalling, is clearly prohibited according to the primary sources of Shariah. This behaviour distracts the true nature of Islamic financial system, which is based on ethics. The managers who do so are involved in lie, Khayanah, theft, hypocrisy and indulging in partnership that are considered major sins in Islam.
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Copyright (c) 2022 Qazi Yasir Arafat, Muhammad Akbar Khan, Abdul Rashid
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