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...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 eamings 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.展开更多
文摘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 eamings 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.
