Accruals Earnings Management Proxies: Prudent Business Decisions or Earnings Manipulation?

2021 ◽  
Author(s):  
Theodore E. Christensen ◽  
Adrienna Huffman ◽  
Melissa F. Lewis‐Western ◽  
Rachel Scott
Keyword(s):  
Earnings Management ◽  
Earnings Manipulation ◽  
Business Decisions

Earnings Management Proxies: Prudent Business Decisions or Earnings Manipulation?

2016 ◽  
Author(s):  
Theodore E. Christensen ◽  
Adrienna A. Huffman ◽  
Melissa Fay Lewis-Western
Keyword(s):  
Earnings Management ◽  
Earnings Manipulation ◽  
Business Decisions

scholarly journals EARNINGS MANAGEMENT AS A MANIPULATIVE FORM OF FINANCIAL REPORTING

2019 ◽  
Vol 34 (5) ◽  
pp. 1323-1328
Author(s):  
Marija Milojičić ◽  
Snežana Knežević ◽  
Aleksandar Grgur
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Financial Analysis ◽  
Balance Sheet ◽  
Financial Statements ◽  
Legal Framework ◽  
Business Decisions ◽  
Accounting Principles ◽  
The Republic

The financial statements, as the end product of the accounting information system, are a structural account of the financial position and financial success of an entity's business over a period. Earnings or net profit indicates an important position in the financial statements and is considered as a measure of a company’s success. Earnings management comes from the accounting skills that executives and business owners use when making business decisions. The Generally Accepted Accounting Principles set out in International Accounting Standards (hereinafter IAS) and International Financial Reporting Standards (hereinafter referred to as IFRS) generally give the owner or manager the choice between several accounting methods within the various stages of the accounting process. One of these methods is creative accounting, which is often correlated with the manipulation of financial statements. Creativity in accounting is known to be legal and to stay within the legal framework, but it is often the case that, with its creativity, it is beyond its boundaries. The way managers exercise this discretion is very important to the quality and objectivity of financial reporting.The tendency of the owners, and then the managers, to show the performance of the company better than they really are, is certainly not new. The reason that in the world from the beginning of the 2000s to the present day, both by the scientific and professional public and by the regulatory bodies in charge of financial reporting, particular attention is paid to this problem are the major political and economic scandals caused by the inaccurate presentation of financial statements. It is considered that manipulative accounting practices are applied in the preparation of financial statements when the application of accounting principles is made with the intention of achieving the desired objective, such as, for example, generating greater profit regardless of whether the procedures selected are in accordance with international and local prescribed rules.The prevalence of manipulation of financial statements depends on the situation in the environment, the quality of the normative basis of financial reporting, the quality of management and the ability of accountants to comply with professional and ethical standards. The environment implies the general economic situation, the existence or absence of appropriate legislation, including its implementation, as well as the relation to tax liabilities.The result of the original empirical research is presented in this paper. The research was conducted in the form of a case study of a domestic business entity (the Republic of Serbia), whose main activity is trade in sports and fashion products. The financial analysis was performed using the Beneish model, which was derived from the official financial statements of the companies, collected from publicly available databases (Balance Sheet and Income Statement 2016-2018) as the basic information base in order to discover the degree of possible manipulation of their own earning capacity. This model has become particularly popular since the Beneish M-scoring model revealed the manipulation of the financial results of the US company Enron, which went bankrupt in 2001.

An Analysis of Earnings Management: Evidence from Food & Allied Industry of Bangladesh

2017 ◽  
Vol 7 (2) ◽  
pp. 359
Author(s):  
Ajaan Rahman Khan ◽  
Mohsina Akter
Keyword(s):  
Earnings Management ◽  
Probabilistic Approach ◽  
Listed Companies ◽  
Major Portion ◽  
Earnings Manipulation ◽  
Continuous Basis ◽  
One Year ◽  
Observation Period

The objective of the study is to examine the existence of earnings management within listed companies in the food and allied industry of Bangladesh. The renowned Beneish Model has been used to test whether the firms are involved in any sort of earnings manipulation or not. In addition, the tendency of the companies to continuous practice of earnings manipulation has been examined. The study covers a span of 5 years from 2011 to 2015 where the financial figures are tested on the model to find the probability of the companies being a manipulator of earnings. According to Beneish model, companies with higher M-score (manipulation score) are more likely to be a manipulator. The result shows that twelve out of fourteen companies have significantly higher M-score at least for one year during five-year periods. A further study reveals that a major portion of the industry has the tendency of getting into earnings manipulation on a continuous basis. Though the Beneish Model is a probabilistic approach so it is not stoutly conclusive from the test that companies are manipulating earnings or a continuous manipulator within the observation period.

Diamond Foods, Inc.: Anatomy and Motivations of Earnings Manipulation

2014 ◽  
Vol 30 (1) ◽  
pp. 47-69 ◽  
Author(s):  
Mahendra R. Gujarathi
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Real World ◽  
Financial Statements ◽  
Earnings Manipulation ◽  
Cost Shifting ◽  
The Difference ◽  
The Cost ◽  
Snack Products ◽  
Journal Entries

ABSTRACT Diamond Foods is America's largest walnut processor specializing in processing, marketing, and distributing nuts and snack products. This real-world case presents financial reporting issues around the commodities cost shifting strategy used by Diamond's management to falsify earnings. By delaying the recognition of a portion of the cost of walnuts acquired into later accounting periods, Diamond Foods materially underreported the cost of sales and overstated earnings in fiscal 2010 and 2011. The primary learning goal of the case is to help students understand the anatomy and motivations of earnings manipulation. Specifically, students will have the opportunity to (1) apply the FASB's Conceptual Framework to a real-world context, (2) determine the nature of errors and compute their numerical effects on financial statements, (3) understand motivations for earnings management and actions needed for managing earnings of future years, (4) explain the anatomy of financial reporting fraud by reconstructing journal entries, (5) prepare comparative financial statements for retroactive restatements, (6) explain the rationale for clawback provisions in compensation contracts, and (7) understand the difference between the real and accrual-based earnings management.

Do market participants value earnings management? An analysis using the quantile regression method

2019 ◽  
Vol 45 (1) ◽  
pp. 103-123 ◽  
Author(s):  
Leon Li ◽  
Nen-Chen Richard Hwang
Keyword(s):  
Quantile Regression ◽  
Earnings Management ◽  
Stock Returns ◽  
Stock Prices ◽  
Discretionary Accruals ◽  
Earnings Manipulation ◽  
Content Type ◽  
Market Participants ◽  
Gains And Losses ◽  
Quantile Regression Method

PurposeThe purpose of this paper is to postulate that market participants’ views on the nature of discretionary accruals as earnings management or earnings manipulation could relate to a rise or a fall in a firm’s stock prices.Design/methodology/approachApplying the quantile regression and measuring gains and losses according to the stock returns, this study shows that the relation between earnings manipulation and stock returns is non-uniform and it varies significantly across various quantiles of the latter.FindingsThe empirical results imply a positive (negative) |DA|-RETURN relation for stocks experiencing a rise (fall) in stock prices. This finding is consistent with the notion that market participants lean towards (become) trend followers (fundamentalists) when their stocks price rise (fall) and, thus, positively reward (negatively punish) discretionary accruals.Originality/valueUsing the behavioural heterogeneity of market participants as a research framework, this paper contributes to the literature by demonstrating that market participants’ decisions to positively reward (negatively punish) earning management behaviour depend on their perceptions on nature of discretionary accruals (earnings management vs earnings manipulation).

scholarly journals Real and Accrual Earnings Management around Initial Public Offerings in Jordan

2017 ◽  
Vol 11 (1) ◽  
pp. 204 ◽  
Author(s):  
Mohammad M. Alhadab
Keyword(s):  
Earnings Management ◽  
Initial Public Offerings ◽  
Initial Public Offering ◽  
Earnings Manipulation ◽  
Net Income ◽  
Public Offerings ◽  
Public Offering ◽  
New Evidence

This study examines whether Initial Public Offering (IPO) firms in Jordan utilize real activities and accruals accounting during the offering year to manipulate income. To date the current study is the first to examine real activities and accrual earnings management that undertaken by IPO firms in Jordan. Using a Jordanian sample of 41 IPO firms over the period between 2000 and 2011, this study provides new evidence to the literature that IPO firms in Jordan utilize real activities and accruals accounting to inflate net income that is reported during the offering year. In particular, the findings of current study show that IPO firms report a higher level of earnings manipulation during the offering year that conducted via accrual-based earnings management, sales-based, discretionary expenses-based, and the aggregated measure-based of real activities.

The role of CFO power: Monitor or collusion——Evidence from China

2021 ◽  
pp. 002072092098370
Author(s):  
Yubin Gao ◽  
Ju Mao ◽  
Lingge Zhao
Keyword(s):  
Earnings Management ◽  
Private Enterprises ◽  
Earnings Manipulation ◽  
Compensation Contracts ◽  
Sample Group ◽  
Chinese Context ◽  
Inhibition Effect ◽  
Empirical Results ◽  
Agency Conflict

In combination with the unique cultural and institutional background of China, this paper puts forward the measurement of CFO power in the Chinese context, and systematically analyzes and tests the role of CFO power. The empirical results show that the greater the power of CFO, the lower the degree of earnings management of the company, indicating that the power of CFO is more of a supervisory role, rather than collusion with the CEO due to interests binding. And the inhibition effect only exists in the sample group of private enterprises. Moreover, the supervision role of CFO power only exists in companies with high robustness and severe agency conflict, which shows that CFO reduces their company's earnings manipulation based on their own conservation and by suppressing opportunism. In addition, CFO power helps improve the effectiveness of their own compensation contracts.

scholarly journals Bonds Between Earnings Management and Corporate Financial Stability in the Context of the Competitive Ability of Enterprises

2021 ◽  
Vol 13 (4) ◽  
pp. 167-184
Author(s):  
Katarina Valaskova ◽  
Ane-Mari Androniceanu ◽  
Katarina Zvarikova ◽  
Judit Olah
Keyword(s):  
Earnings Management ◽  
Financial Distress ◽  
Financial Stability ◽  
Statistical Technique ◽  
Earnings Manipulation ◽  
Financial Health ◽  
Chi Square ◽  
Multivariate Statistical ◽  
Financial Strength ◽  
Chi Square Test

The financial health of enterprises and their continued profitability and competitiveness in the market are influenced considerably by the level of earnings achieved. Enterprises are forced to report the best possible results to demonstrate financial strength and competitiveness and to provide a good accounting for investors and creditors. Thus, the main objective of the study is to investigate whether there is any mutual dependence between corporate financial stability and earnings management. To measure these categories, Altman’s Z score was used to determine the financial health of enterprises, and the Beneish M-score and modified Jones model were applied to detect earnings manipulation. Using the chi-square test, the results revealed a statistically significant dependence between financial distress and earnings manipulation. Then, a multivariate statistical technique of correspondence analysis was applied to the categorical data to find categories of factors that are mutually correspondent. Based on a dataset of 11,105 enterprises operating in the Visegrad countries, the results found that enterprises that are threatened by bankruptcy or located in the gray zone tend to manipulate their earnings to maintain credibility, creditworthiness, and competitiveness. Because the financial health of an enterprise provides a potential incentive for earnings manipulation, state authorities, regulators, and policy-makers may benefit from the findings of the study.

scholarly journals Demystifying Earnings Management Through Accruals Management: An Indian Corporate Study

2012 ◽  
Vol 37 (1) ◽  
pp. 49-56 ◽  
Author(s):  
Sandeep Goel
Keyword(s):  
Earnings Management ◽  
Management Practices ◽  
Value Added ◽  
Discretionary Accruals ◽  
High Price ◽  
Earnings Manipulation ◽  
Net Income ◽  
Bottom Line ◽  
Earnings Growth ◽  
Management Issues

Earnings, the “bottom line” or “net income,” are the single-most important item in financial statements. They indicate the extent of company's value-added activities. They help in resource mobilization in capital markets. On account of the said importance of earnings, the management of the company is always interested in their reporting. This is where management exercises choices for reporting of earnings. The recent Satyam saga or Enron in the past are prime examples of misuse of flexibility in choosing the accounting methods and treatments by the management. Earnings management occurs when management uses discretion in financial reporting and in structuring transactions with the objective of securing private gains. Earnings management issues related to financial disclosure and reporting are increasingly relevant to the multitude of firm stakeholders. In the wake of these manipulative corporate practices, investors and managers are trying to understand whether there is widespread Enron-like manipulation of financial results among corporations or whether these scandals are just an aberration. A related issue for financial analysts, investors, and corporate executives is how to distinguish between earnings manipulation that ultimately proves to be fraudulent and the day-to-day struggles of managers to meet pre-determined targets by using various accounting flexibilities. An understanding of the financial statement effects of financial engineering transactions will thus help managers try to avoid future Satyams and Enrons and help to improve the climate for a common investor. A very important dimension of earnings management is that earnings manipulation is usually not the result of an intentional fraud, but the culmination of a series of aggressive interpretations of the accounting rules and application of aggressive operating activities. The end result is misstatement of the financial results by the people involved and realization by them when it gets too late. The typical case of earnings manipulation begins with a track record of success. The company or division has posted significant sales and earnings growth over recent years. Their stock price trades at high price earnings multiple but unfortunately, it is becoming more difficult for the company to maintain the sales and earnings growth as per the analysts� expectations. The management goes for creative accounting practices to manage their earnings. This study analyses the earnings management practices in corporate enterprises in India by examining the magnitude of discretionary accruals. DeAngelo Model has been used for calculating discretionary accruals in regard to potential earnings management for the study. It also explores earnings management issues with respect to industry classification in these enterprises. The sample was drawn from the top 25 listed profit-making companies for the year 2007. The period chosen for the study was 2002–03 to 2007–08. An examination of the units shows a definite presence of accrual management in the sample companies. Most of the units have been found to be exercising income-increasing discretionary accruals. The earnings creativity is further strengthened by industry parameters among the units.

Management Buyouts and Earnings Management

1997 ◽  
Vol 12 (4) ◽  
pp. 373-389 ◽  
Author(s):  
Y. Woody Wu
Keyword(s):  
Earnings Management ◽  
Research Design ◽  
Stock Prices ◽  
Potential Benefit ◽  
Third Party ◽  
Earnings Manipulation ◽  
Downward Movement ◽  
Management Buyouts ◽  
Management Buyout ◽  
Median Change

This study examines earnings manipulation in 87 management buyout cases during 1980–1987. Using a different research design than DeAngelo (1986), this paper shows that earnings changes for the sample are significantly lower than the industry median change in the year before the MBO. An examination of pre-MBO stock prices indicates a downward movement. This downward movement is systematically associated with pre-MBO earnings changes. Moreover, preannouncement declines in earnings are specific to MBOs. In the case of third-party takeovers, income did not decline in the preannouncement period. When this research design is applied to DeAngelo's (1986) sample, results consistent with earnings management are obtained. Taken together, the overall evidence favors the hypothesis that managers manipulated earnings downward prior to the MBO proposal. The potential benefit from earnings manipulation is estimated to be almost $50 million on average for the sample firms.

Sign in / Sign up

Export Citation Format

Share Document