Modelling the Impact of Earnings Management on the Probability of Financial Statements Fraud

Valentin Burca; Adriana Florina Popa; Daniela Nicoleta Sahlian; Daniela Livia Trasca; Nicolae Bobitan

doi:10.5755/j01.ee.33.5.30672

Authors

Valentin Burca West University of Timisoara, Romania https://orcid.org/0000-0003-3713-0629
Adriana Florina Popa Bucharest University of Economic Studies, Romania https://orcid.org/0000-0002-9995-3893
Daniela Nicoleta Sahlian Bucharest University of Economic Studies, Romania https://orcid.org/0000-0002-1881-6337
Daniela Livia Trasca Bucharest University of Economic Studies, Romania https://orcid.org/0000-0001-5752-2289
Nicolae Bobitan West University of Timisoara, Romania

DOI:

https://doi.org/10.5755/j01.ee.33.5.30672

Keywords:

discretionary accruals, real earnings management, F score, Altman score, panel cointegration analysis, financial reporting fraud, data envelopment analysis

Abstract

In the last decades, numerous financial scandals were reported, many related to earnings manipulation and fraud financial reporting. Analytical models were designed and estimation techniques were improved. However, current design of those models suffers from some limitations. The objective of our study is to bring improvements to the analytical models of detection of potential fraudulent financial reporting practices. Therefore, we separately evaluate the impact of real activities earnings management and innate accruals component on the probability of potential fraudulent financial reporting. The empirical analysis is made on a sample of firms with headquarters in G7 countries and the research methodology consists of time series analysis. The results show that, on a long term, the F score is negatively affected by real earnings management activities. Instead, the innate component of accruals seems to reverse over time, having no significant impact in the long run on the probability of fraudulent financial reporting.

Author Biographies

Valentin Burca, West University of Timisoara, Romania

Valentin Burca is a postdoctoral researcher in the Department of Accounting and Audit at the West University of Timisoara and a member of the Body of Expert and Licensed Accountants of Romania. He is also a senior internal auditor in the global department of Internal Audit of Hella corporation, with offices in Timisoara, Romania. His research is focused on financial reporting, sustainability accounting, integrated reporting, controlling, performance management, risk management, internal controls, corporate governance, internal audit with a focus on fraud investigation, and internal audit data analytics. During the last few years, he has been involved in different research projects and published 4 ISI articles and over 25 articles in journals indexed in different international databases.

Adriana Florina Popa, Bucharest University of Economic Studies, Romania

Adriana Florina Popa is an associate professor in the Department of Accounting and Audit at the Bucharest University of Economic Studies, Faculty of Accounting and Management Informatic Systems. Has 20 years of academic and practical experience in the financial-accounting field and research interests in the field of accounting and taxation, being involved in activities dedicated to education at national and international levels. She is also a member of the VAT Expert Group within DG TAXUD - European Commission and in the International Accounting Education Panel of the International Federation of Accountants (IFAC).

Daniela Nicoleta Sahlian, Bucharest University of Economic Studies, Romania

Daniela Nicoleta Sahlian is an associate professor in the Department of Accounting and Audit at Bucharest University of Economic Studies and lecturer of the Body of Expert and Licensed Accountants of Romania. Her research focuses on actuarial accounting, insurance, pension fund accounting, hedging accounting, measuring and recognizing risk in accounting, and IFRS accounting. During the last few years, she has been evolved in different research programs and published 3 ISI articles and over 50 articles in journals indexed in different international databases.

Daniela Livia Trasca, Bucharest University of Economic Studies, Romania

Daniela Livia Trască is an associate professor in the Department of Economics and Economic Policies at the Bucharest University of Economic Studies, Faculty of Theoretical and Applied Economics. She has 17 years of academic and practical experience in the socio-economic development field and research interests in the field of economic integration, real and nominal convergence, competitiveness, being involved in activities dedicated to education at national and international levels. She is also a member of the General Association of Economists from Romania and of the Research Center for Productivity Studies at the Bucharest University of Economic Studies.

Nicolae Bobitan, West University of Timisoara, Romania

Nicolae Bobițan is an associate professor in the Department of Accounting and Audit, Faculty of Economics and Business Administration, West University of Timisoara, and a member of several professional bodies in Romania, having an impressive, practical and academic expertise in all fields of the accounting profession. His academic studies, lectures, and research interest are focused on financial reporting, integrated reporting, and forensic accounting with a focus on fraud and investigative accounting, auditing, and taxation. He has been involved in different research projects, with results published in ISI journals and journals indexed in different international databases.