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How reliable are earnings?: A study about real activities manipulation and accrual-based management in Europe
Umeå University, Faculty of Social Sciences, Umeå School of Business and Economics (USBE), Business Administration.
Umeå University, Faculty of Social Sciences, Umeå School of Business and Economics (USBE), Business Administration.
2013 (English)Independent thesis Advanced level (professional degree), 20 credits / 30 HE creditsStudent thesis
Abstract [en]

Background & Subject discussion: Financial reporting and earnings affect stakeholders’ decisions and is a vital component in firm’s information disclosure. Management possesses considerable influence over financial reports. Earnings consist of a cash-flow and accrual component. Earnings can be affected by managers’ judgment and decision either by accrual-based earnings management or real activities manipulation. Earnings management affects the relevance and reliability of financial reporting and is widely researched.

Europe is consolidating and accounting and audit standards are harmonizing. Real activities manipulation is unobserved in Europe. Increased attention and regulations of earnings management are inducing more creative methods to alter earnings, such as stock repurchases.

Purpose: The main purpose of this study is to investigate if real activities manipulation can be observed in Europe and to what extent in relationship to accrual-based activities to avoid reporting small losses. An underlying purpose is to study different methods of RAM, including some newer approaches to detect hypothesized RAM by stock repurchases. An additional purpose is to evaluate the different utilized detection methods to clarify effectiveness. The final purpose is to consider possible effects of EM on reliability and relevance of financial reporting.

Conclusion: The result concludes that earnings management are performed by real activities manipulation. Stock repurchases, decreased discretionary expenses and production cost all indicate earnings management to avoid reporting earnings below a specific benchmark. The result questions the reliability and relevance of reported earnings.

Place, publisher, year, edition, pages
2013. , 71 p.
Keyword [en]
earnings management, earnings management incentives, motives of earnings management, real earnings management, earnings benchmarks, earnings management Europe
National Category
Business Administration
URN: urn:nbn:se:umu:diva-73307OAI: diva2:630890
Educational program
Study Programme in Business Administration and Economics
Social and Behavioural Science, Law
Available from: 2013-08-20 Created: 2013-06-19 Last updated: 2013-08-20Bibliographically approved

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