Earnings management through accruals: A diagnostic analysis of indian corporate sector

Abstract

Earnings management has caught the attention of regulators, policy makers and corporate stakeholders due to soaring accounting frauds. This has caused erosion of investors’ wealth and loss of public confidence in financial reports. In such an alarming situation, the need of the hour is to shield the stakeholders from illusive earnings management practices and accounting frauds. Taking a step ahead in this direction, the present paper makes an attempt to examine the magnitude of earnings management in BSE 500 companies across various industries and sectors of the Indian economy over a period of three years commencing from 2013 to 2015. This study further explores the relation between earnings management varies with the size of the business. Modified Jones Model (1995) has been used to estimate the discretionary accruals which act as a proxy for earnings management. The results of the study demonstrate that average discretionary accruals are 1.789 per cent of total assets of the firm. Further, it is found that manufacturing of food product industry is contributing the highest percentage discretionary accruals in industrial classification. Service sector firms are dominated by income decreasing earnings management whereas non service sectors and small firms have been found to be exercising income increasing earnings management.