Bank earnings management using commission and fee income: The role of investor protection and economic fluctuation

Peterson K. Ozili, Erick Outa

Research output: Contribution to journalArticlepeer-review


Purpose: The purpose of this paper is to investigate whether banks use commission and fee (CF) income to manage reported earnings as an income-increasing or income smoothing strategy. 

Design/methodology/approach: The authors employ the regression methodology to detect real earnings management. 

Findings: The authors find that banks use CF income for income smoothing purposes and this behaviour persists during recessionary periods and in environments with stronger investor protection. The implication of the findings is that bank non-interest income which achieves diversification gains to banks is also used to manipulate reported earnings. 

Research limitations/implications: The findings show that real earnings management is prevalent among banks in Africa. Further research into earnings management should examine real earnings management among non-financial firms in developing regions. 

Practical implications: From an accounting standard setting perspective, the evidence suggests the need for national/international standard setters to adopt strict revenue recognition rules that ensure that banks or firms report the actual fees they make, and to discourage banks from delaying (or deferring) the collection of fee income to manage or smooth reported earnings opportunistically. 

Originality/value: This study contributes to the positive accounting theory (PAT) literature which examines the accounting and non-accounting decisions that influence managers’ choice of accounting methods in financial reporting. Extending the PAT, the authors show that certain conditions can incentivize managers to engage in earning management such as during recessions and weak institutional quality or weak investor protection.

Original languageEnglish
Pages (from-to)172-189
Number of pages18
JournalJournal of Applied Accounting Research
Issue number2
Publication statusPublished - 13 May 2019
Externally publishedYes


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