Accounting for Climate Change: Exploring Earnings Management in the Face of Environmental Risks

Abstract

This paper argues for the urgent need to address the intersection of climate change and accounting, particularly concerning earnings management. The key objectives of the study are (1) identifying existing gaps and challenges, (2) proposing future research directions, and (3) clarifying the significant implications of climate change for financial reporting. This research makes a vital contribution to the academic literature by providing a historical review that reveals a notable oversight regarding climate change risks in earnings management studies. It offers a thorough discussion of various perspectives on measuring and disclosing climate change information, as well as the complexities involved in identifying and quantifying these risks. The time to act is now; this study serves as a call to action for scholars and practitioners to prioritize this crucial issue. Furthermore, the paper identifies additional avenues for investigation, including the influence of climate-related risks on financial performance metrics, the role of corporate governance in managing carbon-sensitive earnings, and the regulatory landscape pertaining to environmental risk reporting practices. It also examines several research challenges, such as the absence of standardized frameworks for measuring and reporting climate-related risks, the complexities involved in forecasting future risks, and potential conflicts of interest among stakeholders. By addressing these constraints, this study seeks to establish a framework for researchers investigating the influence of climate change risk on earnings management. The findings aim to facilitate informed decision-making and encourage environmentally responsible practices within sustainable business, thereby contributing to the mitigation of additional environmental threats.