Does CEO/CFO certification impact earnings quality? evidence from India

PurposeThis study aims to examine the impact of mandatory CEO/CFO certification introduced in the new Indian Companies Act (CA) 2013 on the earnings quality of reported annual and quarterly net income of Indian listed companies.Design/methodology/approachUsing rounding up of earnings as a proxy for earnings quality, the study is based on annual and quarterly reported net income of 4,128 sample companies during two years prior and two years after the CA 2013. The analysis of reported net income is based on the left-most second single digits with an emphasis on zero as the second single digit. The percentage difference between the actual and theoretical second single digits in reported net income is used for rounding up analysis. Benford's Law is used to derive the theoretical percentage appearance of second single digits.FindingsThe existence of statistically significant deviation prior to CA 2013 and insignificant deviation post CA 2013 between the actual and theoretical percentage appearance of zero and nine of annual net income implies the increase in quality of earnings due to mandatory certification of annual financial statements. However, there is no improvement in the quality of earnings of quarterly net income as the certification of quarterly results is not mandatory.Research limitations/implicationsThe authors recommend that CEO/CFO certification of quarterly financial results should also be made mandatory.Originality/valueThe positive impact of regulatory initiatives on the earnings quality of publicly listed companies operating in a weak enforcement environment within an emerging market is the contribution.