Earnings Management Practices in Indian Companies: A Cross-Sectional Analysis

Abstract

Corporate accounting frauds over the last two decades have caused massive erosion of investor wealth and shattered public confidence in regulators and capital markets. Deliberate manipulation of financial numbers by a company is rarely a one-off event; it is more a culture of widespread earnings management that permeates an organization and eventually leads to a full-blown accounting fraud. This paper looks at earnings management practices in Indian companies and examines the extent of earnings management prevalent across firms of varying market capitalization. The present study examines 130 listed Indian companies during the period of 2013-2015. The findings of this study provide a measure of the quality of financial reporting in India. Modified Jones model (1995) is used to estimate discretionary accruals (DA), which is considered as a proxy for earnings management. The average DA is estimated at 5.6% of the total assets of the firms, which is comparable to the estimates in other parts of the world (about 1%-5% of total assets). A sector-specific analysis reveals presence of higher earnings manipulation in the consumer durable and energy sectors. Large cap companies are found to show a lower level of earnings management as compared to the small-cap firms. The study also finds a dip in the magnitude of DA in 2015, which is the first year of application of the new Companies Act 2013. Subsequent years will reveal the true success of the new Act in enforcing a stricter regime of corporate governance and greater accountability of corporate boards and audit committees. International studies point towards a high degree of correlation between effective audit committees and lower levels of earnings management in companies. Further work in this field from an Indian context will help identify factors that have a constraining effect on earnings management, and ultimately help preserve the sanctity of reported financial numbers.

What are the effects of culture and institutions on classification shifting in India?

“…For example, Goel (2014) observes that the pressure to meet earnings targets and analysts' forecasts and thereby derive private benefits is the driving force for earnings management in India, as in the US and UK. Mishra and Malhotra (2016) observe that in India, the flexibility to choose accounting policies and treat accounting transactions in different ways has negatively affected shareholder wealth and portrayed a false picture of the company's actual performance to gullible current and prospective investors, who rely on the company's financial reports when making investment decisions. Thus, firm managers exploit this flexibility to opportunistically manipulate the available choices to influence the quality of financial reporting.…”

Corporate governance, financial transparency and currency devaluation shocks: evidence from Egypt

“…Many researchers demonstrate that audit committee activity limits EM (Lin and Hwang, 2010). However, Mishra and Malhotra (2016) demonstrate a non-significant association, and Katmon and Farooque (2017) support a positive association. The Egyptian CG code requires audit committees to meet at least once every three months.…”

Konsentrasi Kepemilikan, Transaksi Pihak Berelasi, dan Kinerja Perusahaan

“…592-603 DOI: https://doi. org/10.24843/EJA.2019.v29.i02.p08 dengan tujuan manajemen laba, transaksi-transaksi dengan pihak yang memiliki hubungan istimewa ditujukan untuk memanipulasi laba perusahaan (Wong et al, 2015;Rasheed & Mallikarjunappa, 2018). Berdasarkan pengembangan hipotesis, hipotesis kedua penelitian ini adalah H2: Transaksi pihak berelasi berpengaruh negatif terhadap kinerja perusahaan.…”