Cosmetic earnings management and quarterly reporting: evidence from European companies

Vladimir Stojanovic and Karol Borowiecki

International Journal of Economics and Accounting, 2015, vol. 6, issue 3, 248-275

Abstract: It is difficult to detect cosmetic earnings management in companies' financial reporting and whether it is a deliberate manipulation or an unintended false estimation. The study is based on quarterly reporting of European companies compliant under IFRS in the period between 2004 and 2009. We investigate whether the earnings numbers follow Benford's law, which states the theoretical distribution of digits in naturally occurring numbers. We find significantly more zeros and fewer nines in the second place of positive earnings numbers. On contrary, in the second place of negative earnings numbers, we find significantly fewer zeros and an excess of higher numbers. These results suggest that cosmetic earnings management is present on a wide scale across European countries. Using quarterly data, we find that the extent of rounding behaviour decreases towards the fourth quarter, remaining in general however significant. The analysis delivers also some tentative evidence on the existence of differences across European regions and opens up questions for future research on the existence of these differences.

Keywords: Benford's law; fraud detection; cosmetic earnings management; earnings rounding-up behaviour; quarterly reporting; financial reporting; deliberate manipulation; false estimation; IFRS; Europe. (search for similar items in EconPapers)
Date: 2015
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