Assessing the Practice of Earnings Management in COVID-19 Era. Landscape of European Companies: An International Comparison

Abstract

Beginning of 2020, the COVID-19 crisis holds for firms all over the world. Under these circumstances, the purpose of this paper is to evaluate the landscape of the European countries in terms of the earnings manipulation in COVID-19 era. Therefore, we compared companies from 15 European countries. The results show that the deteriorating economic conditions caused by COVID-19 are reflected in the managers’ activity for earnings management in the context of European companies. Moreover, the panorama of earnings management activities in Europe is quite heterogeneous and inconsistent as we observe significant differences between European countries in the practice of earnings management. Additionally, rather than a single incentive or factor, we find a wide range of variables that affected managers’ decisions to engage in earnings manipulation in COVID-19 times. Indeed, the results show that lack of growth opportunity caused by the pandemic, increased amount of debt, volatility of cash flow or sales, even size, age, or book value, were variables that influenced managers’ decisions to manipulate earnings in pandemic. In addition, the industry effect cannot be separated from the impact of COVID-19.  Surprisingly, institutional mechanisms of control, including audit quality or board monitoring, which are widely documented in the literature as limiting earnings management, were ineffective in the COVID-19 period. The presence of mechanisms of control is considered essential variables that limit the practices of earnings management, but even these can occasionally fail, as confirmed our study.