Earnings management is one of the most challenging, debated and controversial topics in finance and financial management. This method is performed by the company’s management in the process of preparing the financial statements and can affect the level of earnings shown (Mahdaleta et al. 2016). Thus, EM occurs when managers use their financial reporting decisions and prepare transactions to alter financial statements to either create a false picture for stakeholders about the company’s economic performance or to influence contractual results that depend on accounting figures reported (Muda et al. 2018). Moreover, it has been demonstrated that the existence of CSR-contingent executive compensation contracts can serve, if the contingent remuneration is high, to persuade managers to manipulate performance (Li and Thibodeau 2019).

In this context, earnings management is seen as the use of accounting techniques to produce financial statements that present an overly positive view of corporate business activities and financial position (Ye 2007) and aims to achieve stable and predictable financial results (Healy 1985). Additionally, EM helps to achieve specific targets involving the manipulation of accruals through the discretionary choices of accrual accounting (McNichols and Wilson 1988).

CSR activity by companies is based on the agency theory. This theory claims that it is necessary to limit the opportunistic behavior of the administration (Jensen and Meckling 1976; Mahrani and Soewarno 2018). In addition, this theory is complemented by the theory of legitimacy and stakeholder theory. The first argues that a company’s survival depends on the support of stakeholders (Gray et al. 1995), as they will be affected and influenced by the company’s activities (Freeman 1984; Mahrani and Soewarno 2018). Furthermore, the theory of legitimacy adds that the company must operate according to the prevailing norms of the society or environment in which it is situated. The company seeks to ensure that its operational activities are accepted as “legitimate” (Mahrani and Soewarno 2018).

From a managerial point of view, this research can be used to raise managers’ awareness of the inappropriateness of engaging in practices aimed at manipulating the outcome, which has been demonstrated by the worldwide interest in analyzing this malpractice. From a company owner’s point of view, this research can serve to enhance the implementation of CSR practices as mechanisms to reduce managers’ opportunistic behavior in relation to EM. Finally, it could be helpful for auditors as well. Auditors have to evaluate the quality of the EM and if the audited company has a developed CSR system, it could be considered by auditors as a positive factor to reduce the irregular audit risk.

Research on EM is an important constant concern within CSR. In this context, EM is perceived as an act that is irresponsible according to CSR principles (Choi et al. 2018), as CSR-oriented companies are more likely to act responsibly when reporting their financial statements (Wang and Choi 2013). This is because business organizations with strong social responsibility commitments are less likely to manage their profits, and do not hide unfavorable profit-making, and therefore do not engage in EM. In this context, EM is broadly interpreted as a latent threat and an unwanted practice, which could potentially result in devastating long-term effects if relevant suspicions, as signaled by various sources and events, are made public (Dechow and Skinner 2000).

Thus, it is widely accepted that EM and CSR are linked through two perspectives. The first of these corresponds to the long-term perspective hypothesis, which suggests that socially responsible companies generally focus on fostering future stakeholder relationships (Mercedes Palacios-Manzano et al. 2019). Hence, business organizations committed to CSR tend to encourage long-term relationships with stakeholders rather than maximizing their profits in the short term (Choi et al. 2018). This results in companies’ commitment to CSR being largely driven by the long-term perspective (Ehsan et al. 2021). Thus, companies use CSR practices to manage or manipulate the information needs of various powerful stakeholder groups in society (such as employees, shareholders, non-governmental agencies and the general public) in order to gain their support, which is necessary for the survival of the company and its stakeholders (Gray et al. 1995). As a result, business organizations committed to CSR tend to encourage long-term relationships with stakeholders rather than maximizing short-term profits (Wang and Choi 2013).

On the other hand, the second perspective is related to the managerial opportunism hypothesis, which suggests that managers who manage for profit can strategically use CSR information to disguise their opportunistic behavior (Mercedes Palacios-Manzano et al. 2019). It is important to note that economic cycles and financial performance play important roles in the relation between CSR and EM (Gonçalves et al. 2021). Thus, previous research has demonstrated the efforts made by managers to demonstrate better measures of profitability through EM practices in order to secure their personal financial incentives (Walker 2013). As a result, managers pursue their own self-interest by reporting earnings in financial statements that do not show an accurate picture of the true economic situation of the company (Scholtens and Kang 2013) because some of them are likely to take discretionary actions with respect to reported revenues in order to maximize their own profit (Sun et al. 2010). Therefore, EM activities are conceptualized as opportunistic practices through which managers inflate earnings to meet budget targets in order to increase their own compensation (Grougiou et al. 2014). In this way, managers can use CSR to reduce the likelihood of being scrutinized by unsatisfied stakeholders in the first place (Prior et al. 2008) and maximize their own private benefits (Choi et al. 2018). A similar conclusion was achieved by Lui et al. (Liu et al. 2017), who determined that companies with a deep CSR system show a more aggressive EM behavior. However, there is controversy about whether only the mandatory CSR impacts on the EM or the voluntary CSR affects EM (Gong and Ho 2021).

In conclusion, EM is perceived as irresponsible according to CSR principles, as CSR-oriented companies are more likely to act responsibly because they report on their financial statements (Wang and Choi 2013). Therefore, they are less likely to manage their profits, and they do not hide unfavorable profit-taking, so they do not engage in EM (Mercedes Palacios-Manzano et al. 2019). Additionally, CSR can be used as a mechanism to distort earnings information to become a tool to achieve managers’ self-interested objectives (Prior et al. 2008).