The quality of reported numbers by the management: A case testing of earnings management of corporate India

Abstract

Purpose

The present article aims to test the fairness of reported numbers by the management and examine the magnitude of earnings management in Indian corporate enterprises by testing the Beneish profit model. This paper contributes by further verifying the results of the Beneish model by applying the concept of “quality of earnings and revenue” to the sample units. Quality of reported numbers by the management has always been a concern for a common shareholder on account of the underlying proposition of earnings management. There are numerous models available to test the quality of these numbers, i.e. presence of earnings management. Most of these models are accrual based which have been subject to significant criticism due to estimate-based approach. The Beneish profit model, which combines accruals and financial ratios and/or indexes, is one such alternative to the accruals approach.

Design/methodology/approach

A “case-based” research approach has been followed here for analyzing Indian corporate enterprises on select basis. The Beneish profit model, developed specifically for testing earnings quality and detecting earnings management, has been used in the present study. The data analysis has been well supported by “quality measurement tools”.

Findings

An examination of the units shows the need for improvement in the quality of earnings in the sample units, and there is a presence of earnings management in them.

Research limitations/implications

The present study could be confined to only top 12 profit-making corporate enterprises in the private sector in India, leaving all other enterprises due to data non-availability. Of 25 enterprises, there were public sector undertakings too which had to be excluded.

Practical implications

The present study was confined to only 12 profit-making corporate enterprises in the private sector due to sampling requirements; the scope of the units can be extended to other units in diverse sectors with different size and scale of operations. It would further verify the present discussion and also provide future enlightenment on the issue of earnings management.

Originality/value

It is an original article which explores creative accounting practices for better shareholders’ interest.

Citation

Goel, S. (2014), "The quality of reported numbers by the management: A case testing of earnings management of corporate India", Journal of Financial Crime, Vol. 21 No. 3, pp. 355-376. https://doi.org/10.1108/JFC-02-2013-0011