Discretionary Accruals-Earnings Management Across Industries: Implications for Financial Reporting Quality

Abstract

This study explores the variations in discretionary accruals’ specific earnings management practices across different industries and their implications for financial reporting quality. Discretionary accruals are part of earnings management which affect the quality of financial reporting. These can distort financial statements and mislead stakeholders. Understanding how these practices differ among industries provides valuable insights for regulators, investors, and financial analysts. Yet, literature is overly scarce on specific industries which are most affected by discretionary accruals. Delving into information from a robust principles-based economy adopting IFRS, this paper addresses a research gap with a dataset spanning multiple industries over a multi-year period from 2013 to 2022. The Dechow, Kasznik, and Kothari models are employed to assess the extent of discretionary accruals within each industry. Based on winsorized mean and standard deviation, the industries which appeared most in the list of signed and absolute discretionary accruals were Energy and Financials followed closely by the Technology industry. Additionally, applying panel data regressions with multiple fixed effects, the size of a firm, equity ratio, asset turnover, and past profitability were significant in the models which influence discretionary accruals whereas the impact of liquidity was not statistically significant.

Keywords

• discretionary accruals
• financial reporting quality
• fixed effects regressions
• industry differences
• non-parametric tests