Detection of earnings manipulations during the corporate life cycle in Central European countries
DOI:
https://doi.org/10.24136/eq.3030Keywords:
earnings management, corporate life cycle, cash flow patternAbstract
Research background: The growing trend of financial distress risk worldwide increases the need for effective tools to detect accounting manipulation by stakeholders (debt holders, shareholders, suppliers, and customers). However, the well-known models of accrual earnings management do not reflect the financial specificity of individual life cycle stages and their cash flow patterns.
Purpose of the article: The study examines the impact of the corporate life cycle on the reliability of accrual earnings management models and identifies appropriate models for detecting accounting manipulation in Central European countries.
Methods: Seven accrual earnings management models were used. They were evaluated based on five criteria: explanatory power (adjusted coefficient of determination), overall significance of the regression model, significance of the regression coefficients, predicted sign of the regression coefficients, and standard errors of the estimated regression coefficients. Finally, a comprehensive scoring model was used to determine the overall quality of the models examined. The study was conducted on a sample of more than 30,000 enterprises from four Central European countries (the Czech Republic, Hungary, Poland, and Slovakia), with data covering the period 2017–2021. The Dickinson non-sequential life cycle model was used to distinguish life cycle stages according to cash flow patterns.
Findings & value added: The results of the study suggest that, firstly, discretionary accruals vary across countries as well as over the firm's life cycle; earnings manipulations have an inverted U-shape with mature firms tending to reduce their accounting profit. The reliability of the models examined was poor in the case of start-ups. This reflects the need to distinguish between life cycle stages in the detection of earnings manipulation.
Downloads
References
Akbar, M., Akbar, A., Maresova, P., Yang, M., & Arshad, H. M. (2020). Unraveling the bankruptcy risk-return paradox across the corporate life cycle. Sustainbility, 12(9), 3547.
DOI: https://doi.org/10.3390/su12093547
View in Google Scholar
Bartov, E., Gul, F. A., & Tsui, J. S. L. (2000). Discretionary-accruals models and audit qualifications. Journal of Accounting and Economics, 30(3), 421–452.
DOI: https://doi.org/10.1016/S0165-4101(01)00015-5
View in Google Scholar
Belas, J., Jan, D., Hlawiczka, R., Smrcka, L., & Khan, K. A. (2024). SMEs sustainability: The role of human resource management, corporate social responsibility and financial management. Oeconomia Copernicana, 15(1), 307–342.
DOI: https://doi.org/10.24136/oc.2937
View in Google Scholar
Beneish, M. D. (2001). Earnings management: A perspective. Managerial Finance, 27(12), 3–17.
DOI: https://doi.org/10.1108/03074350110767411
View in Google Scholar
Beslic, I., Beslic, D., Jaksic, D., & Andric, M. (2015). Testing the models for detection of earnings management. Industrija, 43(3), 55–79.
DOI: https://doi.org/10.5937/industrija43-8035
View in Google Scholar
Callao, S., Jarne, J. I., & Wroblewski, D. (2017). Detecting earnings management investigation on different models measuring earnings management for emerging eastern European countries. International journal of research – Granthaalayah, 5(11), 222–259.
DOI: https://doi.org/10.29121/granthaalayah.v5.i11.2017.2351
View in Google Scholar
Can, G. (2020). Do life – cycles affect financial reporting quality? Evidence from emerging market. Cogent Business & Management, 7(1), 1854147.
DOI: https://doi.org/10.1080/23311975.2020.1854147
View in Google Scholar
Chen, T. (2016). Internal control, life cycle and earnings quality. Open Journal of Business and Management, 4(2), 301–311.
DOI: https://doi.org/10.4236/ojbm.2016.42032
View in Google Scholar
Chen, X., Yang, W., & Huang, D. (2010). Corporate life cycle and the accrual model: An empirical study based on Chinese listed companies. Frontiers of Business Research in China, 4(4), 580–607.
DOI: https://doi.org/10.1007/s11782-010-0112-1
View in Google Scholar
Christensen, T. E., Huffman, A., Lewis-Western, M. F., & Scott, R. (2022). Accruals earnings management proxies: Prudent business decisions or earnings manipulation? Journal of Business Finance & Accounting, 49(3-4), 536–587.
DOI: https://doi.org/10.1111/jbfa.12585
View in Google Scholar
Comporek, M. (2019). The use of operational cash flow in the estimation of accrual-based earnings management. Financial Sciences, 24(2), 46–60.
DOI: https://doi.org/10.15611/fins.2019.2.04
View in Google Scholar
Comporek, M. (2021). Estimating accrual-based models in Poland: The time series data approach and the cross-sectional data approach. Argumenta Oeconomica, 1(46), 205–237.
DOI: https://doi.org/10.15611/aoe.2021.1.10
View in Google Scholar
DeAngelo, L. (1986). Accounting numbers as market valuation substitutes: A study of management buyouts of public stockholders. Accounting Review, 61(3), 400–420.
View in Google Scholar
Dechow, P., Ge, W., & Schrand, C. (2010). Understanding earnings quality: A review of the proxies, their determinants and their consequences. Journal of Accounting and Economics, 50(2-3), 344–401.
DOI: https://doi.org/10.1016/j.jacceco.2010.09.001
View in Google Scholar
Dechow, P. M., Sloan, R. G., & Sweeney, A. P. (1995). Detecting earnings management. Accounting Review, 70(2), 193–225.
View in Google Scholar
Dickinson, V. (2011). Cash flow patterns as a proxy for firm life cycle. Accounting Review, 86(6), 1969–1994.
DOI: https://doi.org/10.2308/accr-10130
View in Google Scholar
Durana, P., Blazek, R., Machova, V., & Krasnan, M. (2022). The use of Beneish M-scores to reveal creative accounting: Evidence from Slovakia. Equilibrium. Quarterly Journal of Economics and Economic Policy, 17(2), 481–510.
DOI: https://doi.org/10.24136/eq.2022.017
View in Google Scholar
Durana, P., Michalkova, L., Privara, A., Marousek, J., & Tumpach, M. (2021). Does the life cycle affect earnings management and bankruptcy? Oeconomia Copernicana, 12(2), 425–461.
DOI: https://doi.org/10.24136/oc.2021.015
View in Google Scholar
Dvorský, J., Švihlíková, I., Kozubíková, L., Frajtova Michalíková, K., & Balcerzak, A. P. (2023). Effect of CSR implementation and crisis events in business on the financial management of SMEs. Technological and Economic Development of Economy, 29(5), 1496–1519.
DOI: https://doi.org/10.3846/tede.2023.19821
View in Google Scholar
Ecker, F., Francis, J., Olsson, P., & Schipper, K. (2013). Estimation sample selection for discretionary accruals models. Journal of Accounting and Economics, 56(2-3), 190–211.
DOI: https://doi.org/10.1016/j.jacceco.2013.07.001
View in Google Scholar
Gajdosikova D, Valaskova K, & Durana P. (2022). Earnings management and corporate performance in the scope of firm-specific features. Journal of Risk and Financial Management, 15(10), 426.
DOI: https://doi.org/10.3390/jrfm15100426
View in Google Scholar
Gu, Z., Lee, C. W. J., & Rosett, J. G. (2005). What determines the variability of accounting accruals? Review of Quantitative Finance and Accounting, 24(3), 313–334.
DOI: https://doi.org/10.1007/s11156-005-6869-1
View in Google Scholar
Gunny, K. (2010). The relation between earnings management using real activities manipulation and future performance: Evidence from meeting earnings benchmarks. Contemporary Accounting Research, 27(3), 855–888.
DOI: https://doi.org/10.1111/j.1911-3846.2010.01029.x
View in Google Scholar
Habib, A., & Hasan, M. M. (2019). Corporate life cycle research in accounting, finance and corporate governance: A survey, and directions for future research. International Review of Financial Analysis, 61, 188–201.
DOI: https://doi.org/10.1016/j.irfa.2018.12.004
View in Google Scholar
Habib, A., Ranasinghe, D., Wu, J. Y., Biswas, P. K., & Ahmad, F. (2022). Real earnings management: A review of the international literature. Accounting & Finance, 62, 4279–4344.
DOI: https://doi.org/10.1111/acfi.12968
View in Google Scholar
Hastuti, T. D., Ghozali, I., & Yuyetta, E. N. A. (2017). The effect of company life cycles on the accruals earnings management with internal control system as moderating variable. Polish Journal of Management Studies, 15(1), 66–75.
DOI: https://doi.org/10.17512/pjms.2017.15.1.07
View in Google Scholar
Healy, P. (1985). The effect of bonus schemes on accounting decisions. Journal of Accounfing and Economics, 7(1-3), 85–107.
DOI: https://doi.org/10.1016/0165-4101(85)90029-1
View in Google Scholar
Hribar, P., & Collins, D.W. (2002). Errors in estimating accruals: implications for empirical research. Journal of Accounting Research, 40, 105–134.
DOI: https://doi.org/10.1111/1475-679X.00041
View in Google Scholar
Hribar, P., & Yehuda, N. (2015). The mispricing of cash flows and accruals at different life-cycle stages. Contemporary Accounting Research, 32(3), 1053–1072.
DOI: https://doi.org/10.1111/1911-3846.12117
View in Google Scholar
Hussain, A., Akbar, M. Khan, M. K., Akbar, A., Panait, M., & Voica, M. C. (2020). When does earnings management matter? Evidence across the corporate life cycle for non-financial Chinese listed companies. Journal of Risk and Financial Management, 13(12), 313.
DOI: https://doi.org/10.3390/jrfm13120313
View in Google Scholar
Janoskova, K., Balcerzak, A. P., & Kral, P. (2024). An unconventional approach to evaluating the financial performance under critical macroeconomic disturbances: The case of Public transport during the Covid-19 pandemic. Polish Journal of Management Studies, 29(2), 273–292.
View in Google Scholar
Jeter, D. C., & Shivakumar, L. (1999). Cross-sectional estimation of abnormal accruals using quarterly and annual data: Effectiveness in detecting event-specific earnings management. Accounting and Business Research, 29(4), 299–319.
DOI: https://doi.org/10.1080/00014788.1999.9729590
View in Google Scholar
Jones, J. J. (1991). Earnings management during import relief investigations. Journal of Accounting Research, 29(2), 193–228. https://doi.org/ 10.2307/2491047.
DOI: https://doi.org/10.2307/2491047
View in Google Scholar
Jovanovic, B. (1982). Selection and the evolution of industry. Econometrica, 50(3), 649–670.
DOI: https://doi.org/10.2307/1912606
View in Google Scholar
Kasznik, R. (1999). On the association between voluntary disclosure and earnings management. Journal of Accounting Research, 37(1), 57–81.
DOI: https://doi.org/10.2307/2491396
View in Google Scholar
Key, K. (1997). Political cost incentives for earnings management in the cable television industry. Journal of Accounting and Economics, 23(3), 309–337.
DOI: https://doi.org/10.1016/S0165-4101(97)00012-8
View in Google Scholar
Kliestik, T., Belas, J., Valaskova, K., Nica, E., & Durana, P. (2020). Earnings management in V4 countries: The evidence of earnings smoothing and inflating. Economic Research-Ekonomska Istraživanja, 34(1) 1–19.
DOI: https://doi.org/10.1080/1331677X.2020.1831944
View in Google Scholar
Kliestik, T., Novak Sedlackova, A., Bugaj, M., & Novak, A. (2022). Stability of profits and earnings management in the transport sector of Visegrad countries. Oeconomia Copernicana, 13(2), 475–509.
DOI: https://doi.org/10.24136/oc.2022.015
View in Google Scholar
Kothari, S. P., Leone, A. J., & Wasley, C. E. (2005). Performance matched discretionary accrual measures. Journal of Accounting and Economics, 39(1), 163–197.
DOI: https://doi.org/10.1016/j.jacceco.2004.11.002
View in Google Scholar
Kovacova, M., Hrosova, L., Durana, P., & Horak, J. (2022). Earnings management model for Visegrad Group as an immanent part of creative accounting. Oeconomia Copernicana, 13(4), 1143–1176.
DOI: https://doi.org/10.24136/oc.2022.033
View in Google Scholar
Lee, B. B., & Vetter, W. (2015). Critical evaluation of accrual models in earnings management studies. Journal of Accounting and Finance, 15(1), 62–71.
View in Google Scholar
Leuz, C., Nanda, D., & Wysocki, P. D. (2003). Earnings management and investor protection: An international comparison. Journal of Financial Economics, 69(3), 505–527.
DOI: https://doi.org/10.1016/S0304-405X(03)00121-1
View in Google Scholar
Liu, M. (2007). Accruals and managerial operating decisions over the firm life cycle. SSRN Electronic Journal.
DOI: https://doi.org/10.2139/ssrn.1013536
View in Google Scholar
Lizinska, J., & Czapiewski, L. (2018). Towards economic corporate sustainability in reporting: What does earnings management around equity offerings mean for long-term performance? Sustainbility, 10(12), 4349.
DOI: https://doi.org/10.3390/su10124349
View in Google Scholar
Lo, K. (2008). Earnings management and earnings quality. Journal of Accounting and Economics, 45(2-3), 350–357.
DOI: https://doi.org/10.1016/j.jacceco.2007.08.002
View in Google Scholar
Matis, D., Vladu, A. B., Negrea, L., & Sucala, L. (2010). Dechow and Kasznik models significance in the Romanian economic environment. Annales Universitatis Apulensis Series Oeconomica, 1(12), 1–25.
DOI: https://doi.org/10.29302/oeconomica.2010.12.1.25
View in Google Scholar
McKee, T. E. (2005). Earnings management: An executive perspective. Indiana: Thomson.
View in Google Scholar
McNichols, M. F. (2002). The quality of accruals and earnings: The role of accrual estimation errors. Accounting Review, 77(s-1), 61–69.
DOI: https://doi.org/10.2308/accr.2002.77.s-1.61
View in Google Scholar
Michalkova, L., Cepel, M., Valaskova, K., & Vincurova, Z. (2022). Earnings quality and corporate life cycle before the crisis. A study of transport companies across europe. Amfiteatru Economic, 61, 782–796.
DOI: https://doi.org/10.24818/EA/2022/61/782
View in Google Scholar
Nguyen, T. T. H., Ibrahim, S., & Giannopoulos, G. (2023). Detecting earnings management: A comparison of accrual and real earnings manipulation models. Journal of Applied Accounting Research, 24(2), 344–379.
DOI: https://doi.org/10.1108/JAAR-08-2021-0217
View in Google Scholar
Owens, E. L., Wu, J. S., & Zimmerman, J. (2016). Idiosyncratic shocks to firm underlying economics and abnormal accruals. Accounting Review, 92(2), 183–219.
DOI: https://doi.org/10.2308/accr-51523
View in Google Scholar
Papanastasopoulos, G. (2020). Percent accruals and the accrual anomaly: Evidence from the UK. Accounting Forum, 44(3), 287–310.
DOI: https://doi.org/10.1080/01559982.2020.1736758
View in Google Scholar
Roychowdhury, S. (2006). Earnings management through real activities manipulation. Journal of Accounting and Economics, 42(3), 335–370.
DOI: https://doi.org/10.1016/j.jacceco.2006.01.002
View in Google Scholar
Santos-Jaén, J. M., Martín de Almagro-Vázquez, G., & Valls Martínez, M. del C. (2023). Is earnings management impacted by audit fees and auditor tenure? An analysis of the Big Four audit firms in the US market. Oeconomia Copernicana, 14(3), 899–934.
DOI: https://doi.org/10.24136/oc.2023.027
View in Google Scholar
Sawarni, K. S., Narayanasamy, S., & Padham, P. C. (2023). Impact of earnings management on working capital management efficiency. Finance Research Letters, 54, 103778.
DOI: https://doi.org/10.1016/j.frl.2023.103778
View in Google Scholar
Sosnowski, T. (2022). Persistence of pre-IPO earnings of new companies from CEE stock markets. Equilibrium. Quarterly Journal of Economics and Economic Policy, 17(2), 415–434.
DOI: https://doi.org/10.24136/eq.2022.014
View in Google Scholar
Spathis, T. CH. (2002). Detecting false financial statements using published data: Some evidence from Greece. Managerial Auditing Journal, 17(4), 179–191.
DOI: https://doi.org/10.1108/02686900210424321
View in Google Scholar
Strakova, L. (2020). Earnings management in global background. SHS Web of Conferences, 74, 01032.
DOI: https://doi.org/10.1051/shsconf/20207401032
View in Google Scholar
Strakova, L., & Michalkova, L. (2020). Verification of earnings management in Slovak enterprises using Teoh, Welch and Wong model. In P. Jedlicka, P. Maresova, K. Firlej & I. Soukal (Eds.). Proceedings of the international scientific conference Hradec Economic Days 2020, 10, (pp. 733–739). Hradec Králové: University of Hradec Králové.
DOI: https://doi.org/10.36689/uhk/hed/2020-01-083
View in Google Scholar
Svabova, L., Kramarova, K., Chutka, J., & Strakova, L. (2020). Detecting earnings manipulation and fraudulent financial reporting in Slovakia. Oeconomia Copernicana, 11(3), 485–508. https://doi.org/doi.org/10.24136/oc.2020.020.
DOI: https://doi.org/10.24136/oc.2020.020
View in Google Scholar
Svitlik, J., & Zarybnicka Zarova, M. (2018). Earnings discontinuity as the proxy for earnings management: Empirical study from the UK, Germany and the Czech Republic. European Financial and Accounting Journal, 13(4), 25–40.
DOI: https://doi.org/10.18267/j.efaj.217
View in Google Scholar
Teoh, S. H., Welch, I., & Wong, T.J. (1998). Earnings management and the underperformance of seasoned equity offerings Journal of Financial Economics, 50(1), 63–99.
View in Google Scholar
Valaskova, K., & Durana, P. (2020). Global context of disparities in earnings management among enterprises: Evidence from Slovakia. SHS Web of Conferences, 74, 01034.
DOI: https://doi.org/10.1051/shsconf/20207401034
View in Google Scholar
Valaskova, K., Adamko, P., Frajtova Michalikova, K., & Macek, J. (2021). Quo Vadis, earnings management? Analysis of manipulation determinants in Central European environment. Oeconomia Copernicana, 12(3), 631–669.
DOI: https://doi.org/10.24136/oc.2021.021
View in Google Scholar
Walker, M. (2013). How far can we trust earnings numbers? What research tells us about earnings management. Accounting and Business Research, 43(4), 445–481.
DOI: https://doi.org/10.1080/00014788.2013.785823
View in Google Scholar
Wang Z, Akbar M, & Akbar A. (2020). The interplay between working capital management and a firm’s financial performance across the corporate life cycle. Sustainability, 12(4), 1661.
DOI: https://doi.org/10.3390/su12041661
View in Google Scholar
Ye, J. (2007). Accounting accruals and tests of earnings management. Retrieved from: https://ssrn.com/abstract=1003101.
DOI: https://doi.org/10.2139/ssrn.1003101
View in Google Scholar
Zamrudah, R., & Salman, K.R. (2013). Earnings management prediction (a study of company’s life cycle). Indonesian Accounting Review, 3(2), 107–120.
DOI: https://doi.org/10.14414/tiar.v3i02.197
View in Google Scholar
Zang, A. Y. (2012). Evidence on the trade-off between real activities manipulation and accrual-based earnings management. Accounting Review, 87(2), 675–703.
DOI: https://doi.org/10.2308/accr-10196
View in Google Scholar
Zvarikova, K., Dvorsky, J., Belas, J. J., & Metzker, Z. (2024). Model of sustainability of SMEs in V4 countries. Journal of Business Economics and Management, 25(2), 226–245.
DOI: https://doi.org/10.3846/jbem.2024.20729
View in Google Scholar
Downloads
Published
How to Cite
Issue
Section
License
Copyright (c) 2024 Equilibrium. Quarterly Journal of Economics and Economic Policy
This work is licensed under a Creative Commons Attribution 4.0 International License.
