Identify the Earnings Management Tool Used in Free-Usury Banking in Iran: Comparative Evaluation of the Importance of LLP and STGL in the Cornett Approach

The significance of reported earnings for users of financial statements makes it a motive for manipulating this figure for corporate managers who are also responsible for financial reporting. This measure is interpreted as profit management, which will have a negative effect on the quality of reported earnings and the ability to rely on financial reports. The size of banks' resources and their specific functional sensitivities double the importance of paying attention to the reported earnings in this industry. In this research, the Kasznik model has been used for estimating the earnings management index as a model compatible with the Usury-Free banking industry in Iran by unbalanced panel method. Then, by using this index, the main tool used by managers to manage earnings in the banking system is introduced with the estimating of the Cornett model. The results of this research, while confirming the bank manager’s practices in earnings management, have shown that the LLP variable has a larger share than STGL in explaining the profit management index, and is mainly driven by managers for profit management in the banking system. In other words, managers use the loan loss provisions (LLP) to manage their profits more than their use of securities and transactions gain and losses (STGL).