Forecasting the Level of Company’s Earnings Manipulation

Abstract

The purpose of the current paper is to develop a model for forecasting the level of earnings manipulation of Russian companies on the basis of indicators that measure their financial position and financial performance. The sample analyzed in the current paper comprises 620 public companies listed on the Moscow stock exchange in 2009–2014. Regression analysis as well as decision tree methods are used. The paper outlines the main conditions under which a particular type of earnings manipulation is performed by companies in the accounting period next to the current one. It is shown that the main factors influencing the company’s level of earnings manipulation of the next accounting period are: company’s debt ratio, size, return on equity, earnings persistence, financial activities and the level of earnings manipulation of the current period. In the current research only accounting-based methods of earnings manipulation were considered, therefore further research can focus more on the second group of methods, i.e. real earnings manipulation. The results of current research can be used in order to forecast the level of earnings manipulation of Russian companies. These findings can be important to numerous external users of companies’ accounting information (for example, banks, potential investors, state authorities etc.). The current paper contributes to the existing research on earnings manipulation in the following way. Firstly, the existing research papers analyzed in the first place the cases of upward earnings manipulation, while the results of our research can be used in order to predict the whole set of earnings manipulation cases, i.e. upward manipulation, downward manipulation and insignificant manipulation. Furthermore, the current research is one of the first studies of forecasting the level of earnings manipulation of Russian companies.