Earnings Quality During COVID-19 Pandemic: Evidence from South African Listed Companies

Purpose: During unstable economic conditions, investors are risk averse and rely on fundamental information such as accounting information to make investment decisions. It is reported that during the COVID-19 pandemic, businesses have used accounting discretion in order to cope with difficult economic conditions. The use of discretion in the accounting process may instigate earnings manipulations which reduce earnings quality. This raises the following research question: has earnings quality decreased during the COVID-19 pandemic? This paper aimed at examining earnings quality (EQ) of South African listed firms during the COVID-19 pandemic. Specifically, the study examined the EQ of these firms before and during the COVID-19 pandemic. Methodology: Weighted least square regression was used to analyze a sample of 132 non-financial firms listed on the Johannesburg Stock Exchange (JSE) over the period of 2018 to 2021. The sampled firms were extracted from the IRESS research domain. Conservatism and accrual quality were used to measure earnings quality because these two measures required the exercise of discretion. Findings: The results attained were mixed and suggested that, although the sampled firms did not apply accounting conservatism in reported earnings during the COVID-19 pandemic period as compared to the period before the pandemic, there is no evidence of the use of accrual quality to manipulate earnings during the pandemic period as compared to the period before the pandemic. Originality/Value: The paper will shed light on whether accounting information remains reliable during unstable economic conditions. In addition, it will inform regulators on whether the accounting standards were consistently applied during the COVID-19 pandemic.