Earnings Management Practices in Financial Reporting of Public Enterprises

in India: An Empirical Test with M-Score

Chinmoy Roy*1, Pranesh Debnath2
1
(Associate Professor, Department of Commerce, Tripura University, Agartala, India)
2
(Research Scholar, Department of Commerce, Tripura University, Agartala, India)

Abstract: The sweeping crisis of confidence in business and a widespread decline in users’ reliance in
published financial statements in recent years imparted with a significant impetus for re-examination of
financial estimation and reporting practices. This study explores the question of why unwarranted
financial reporting irregularities can be so well hidden in published financial statements of business
enterprises in general, and when the business is financially unsteady, in particular. With the help of
published financial statements over the period from 2002-03 to 2012-13 of 25 enterprises of
Manufacturing, Service, Mining, and Power sector of Public Enterprises in India, different elements are
explored with different ratio metrics and statisticalprocess, and various symptoms of financial estimates
and reporting irregularities are identified. In this study the red flags are uncovered using Beneish’s five
variable M-Score model and shaded the light on the degree of variability between them in terms of
earnings management practices. To validate the explanation of questionable changes and unusual
relationship, different elements are identified through revealing a relationship between variables in terms
of profitability, liquidity, and Assets Turnover of the respective enterprises. It appears that public
enterprises in India with strong profitability signals generally do engage in managing its earnings while
reporting the financial statements. The study found that earnings management practices have a negative
relation with the profitability and positive relation with liquidity position and there is no significant
difference exist in the variability predicting benchmark in different enterprises during the study period in
terms of earnings management practices in public enterprises in India.

Key Words: Earnings Management, M-Score Model, Financial Performance, Public Enterprises, Red
Flags.

Introduction:
Along with a widespread decline in user’s reliance in published financial statements, the
accounting catastrophe of modern era raises a host of questions that are of concern to academics,
regulators and practitioners. Accounting research shows that earnings management practice is
not an unmitigated evil, within limits, it promotes efficient decisions.
But research in this field is marked by (Demski, 2002), (Coffee, 2005), (Erickson & Mbagwu,
2004), (Ronen & Yaari, 2007) offered suggestions for improvements, and the second
groupingare concernedwith the earningsmanagement phenomena and are epitomized by (Ronen

*
Corresponding author (chinmoy68@gmail.com)

Electroniccopy
Electronic copy available
available at:
at:https://ssrn.com/abstract=2551713
http://ssrn.com/abstract=2551713
J. , 2002), (Healy & Palepu, 2003), and others. If we know how earning management practices
takes place and how it is carried out and canidentify the high signal area, we can uproot it.
Understanding the underlying forces that give rise to the alleged anomaly and irregularities in
financial reporting is a necessary precursor to effectively preventing future occurrences. Earnings
management has been found from a very ancient period along with the emergence of accounting.
The recent downfall of giant enterprises like Enron, Lehman, Worldcom, Satyam, Sarada and
many has carried a lot of attention on the study of earnings management. The study of earnings
management in India has grown rapidly, especially since India has become a popular destination
for foreign investors. In general, earnings management is linked with deliberate acts of
manipulation of financial data to achieve some definite objectives. Earnings management has
been defined in many different ways: such as Fields et al (2001), stated that earnings
management arises when managers use their choice over accounting numbers with or without
restrictions. Such discretion can be either firm value maximizing or opportunistic. Earnings
management happens when managers use his personal judgment in financial reporting and in
assembling transactions to modify financial reports either to misinform some investors about the
fundamental economic performance of the company or to influence contractual outcomes that
depend on reported accounting numbers (Healy & Wahlen, 1999). Earnings management arises
when management uses discretion in financial reporting and in structuring transactions with the
objective of securing private gains. Schipper (1989), defines earnings management as the
purposeful interference in the external financial reporting process with the objective of private
gains.
In this study, earnings management is viewed as a premeditated participation in the
external financial reporting process within the compliance of Accounting Standards and other
rules, with the aim of misleading some stakeholders about the underlying economic performance
of the company. Taking advantage of the gray area producer of financial statements achieved
earnings manipulation through the accounting system or business transactions of the company. It
is often known as real earnings management because this involves manipulating real transactions
to alter reported earnings by designing them in such way that the desired result can be obtained.
An earnings the “bottom line’’ are the single-most important item in financial statements. They
indicate the extent of company’s value-added activities. On account of the said importance of

Electroniccopy
Electronic copy available
available at:
at:https://ssrn.com/abstract=2551713
http://ssrn.com/abstract=2551713
earnings, the management of the company has been always interested in their reporting. This is
where management exercises choices for reporting of earnings.

The recent Satyam Scandals and Sarada Scandals in India; Enron Corporation Scandals,
ZZZZ-Best Scandals and Worldcom fall down in the United States are the real life veining
example of misuse of flexibility in choosing the accounting methods and treatments by the
management. Managers mainly participate in earnings management for four kinds of
encouragements namely, external contract incentives, management compensation contract
incentives, regulatory motivations and capital market motivations (Healy & Wahlen, 1999).
However, Earning Manipulation does not always mean the either upward or downward
estimation of financial items in the financial statements rather it may be a combination of upward
and downward without leaving the concealment and the elimination of any item for any private
and/or public interest. Therefore, Earning Manipulation could be broadly categorized in white
(Beneish, 2001; Sankar & Subramanyam, 2001 and Demski et al, 1984) which enhance the
transparency of financial reporting, black (Schipper, 1989) and (Levitt, 1998) involving outright
misrepresentation and fraud, and gray (Fields et al, 2001) is a manipulation of the report within
the compliance framework, which could be either opportunistic or efficiency enhancing. Again,
upward or downward estimation of earnings can also be made depending upon the nature of the
industry (Service or Non-service) under which it is working (Goel, 2012).

Literature Review:

Earnings management practices relating to the composition of transactions to achieve

desired outcomes, diluted earnings per share (Marquardt & Wiedman, 2005), designing mergers
to qualify for the pooling method (Aboody & Williams, 2000), (Ayers & Robinson, 2002),
handling of transactions with related parties are few to cite. Presentation to timing of revenues
and expenses (Bartov E. , 1993), (Butler & Weiss, 2007), and decision with regard to
capitalization of expenses in the form of brand name costs are noteworthy (Muller, 1999).
Accounting treatment through activities manipulation (Roychowdhury, 2006), and investment
decision (Bens & Wong, 2002), reduction of research and development costs (Baber & Haggard,
1991), (Darrough & Rangan, 2005) (Bushee, 1998), (Hansen & Hill, 1991), upsetting selling and

Electronic copy available at: https://ssrn.com/abstract=2551713

administrative costs are few significant contributions. Examples are galore to cite that pro- forma
earnings are different from GAAP earnings, (Gu & Chen, 2004), (Bhattacharya & Mergenthaler,
2007) and pro- forma earnings rose steadily before the implementation [Section 401(B)] of the
Sarbanes- Oxley Act (Bhattachariya & Larson, 2003), (Bradshaw & Sloan, 2002), and then
decreased steadily (Nichols & Street, 2005), (Marques, 2006) (Entwistle & Mbagwu, 2006).

It is found that many firms attempt to depict Financials that is healthier than the GAAP
truth and use pro forma earnings to reduce volatility (Doyle & Soliman, 2003). Kaur et al
(2014), endeavored to grasp earnings management in different sectors of the economy on the
basis of two widely accepted methods: Modified Jones Model and Beneish M Score Model by
taking the data for the year 2012 and 2013. To check whether the methods have anything in
common in detecting earnings management, researchers employed both the methods. Though the
study did not make any attempt at understanding the difference between the two techniques, and
the study found that the number of companies detected as manipulator were more in number in
almost all the sector by M score model. The study aims to assess the level of earnings
management in 6 popular sectors of India and concluded that all the sectors under study were
engaged in earnings management. Noronha et al (2008), scrutinized to detect the most commonly
used earnings management techniques in China and the basic factors that encourage firms to
involve in earnings management. Data were collected through questionnaires from managers and
accountants in mainland Chinese companies. The study found that the size and form of
ownership of companies substantially influence earnings management incentives and techniques
in China. Companies which are coming under public possession have stronger incentives to
manage earnings for management compensation, while private ownership companies pay more
care to tax expense savings. Omar et al (2014), had studied Financial Statements to detect the
Earning manipulation practice by exercising the Beneish Model and found that company is
involved in such practice again to substantiate this result they have used financial ratio analysis
for three consecutive years. The operating ratio analysis shows that the company recorded some
amount of fictitious revenue. In his study(Warshavsky, 2012), analyzed the earning quality of an
organization using Beneish M-Score Model and found that all the companies under study were
categorized as earning manipulator as per the standard value of the model. Mahdi & Ali (2009),
found that fraud is the deliberate falsification of financial statements or other records by persons
internal or external to the authority carried out to disguise the misappropriation of assets or

Electronic copy available at: https://ssrn.com/abstract=2551713

otherwise for gain. A Study by (Perols & Lougee,2011), affirmed that earning management and
accounting fraud are driven by same objective that is intent to deceive the users, but a thin
demarcation line is earnings management earnings management is within GAAP and fraud is
outside. In his study (Kassem, 2012), stated that fraud can be assumed for organization, i.e. to
save tax or misappropriation of assets and misstatement in financial reporting which is against
the organization, and can be done by people inside (namely management or employees) or
outside of the organization such as vendors or customers. In a study (Monem, 2013), investigates
whether Australian gold-mining firms were engaged in downward earnings management during
the period June, 1985 to May, 1988 when Australian gold-mining industry come under intense
political security due to its tax exempted status and rapid economic prosperity and found that
firms under study are involved in downward reported earnings management.

Rocco (1998), defines the four elements of accounting fraud, such as a false
representation of a material fact; representation made with knowledge of its falsity; a person acts
in the representation; and the person acting is damaged by his/her reliance. (Goel, 2012),
attempted to detect the Earning management through Accruals Management using the DeAngelo
Model and found that most of the units are found to be exercising income-increasing
discretionary accruals, as verified by their positive average and service sector firms are engaged
in income-decreasing management on an average basis but non-service sector tends to be
engaged in income-increasing management. (Fields, et al., 2001), found that earnings
management happens when managers exercise their choice over accounting numbers with or
without restrictions. (Patricia,et al., 1995), evaluated the alternative accrual-based models for
detecting earnings management and the result highlights the importance of controlling for
financial performance when investigating earnings management incentives that are correlated
with financial performance. (Sun &Rath, 2009), made a study of Australian earnings
management using a sample of 4,844 firm-year observations across nine Australia industries
from 2000 to 2006, and documented that firms which are small in size, and less profitable and
more likely to engage in earnings management.

Significance of the Study:

Time and again unlike the other developed countries in the Indian economic scenario
since from the inception of Public Enterprise it has been experienced that very few Public

Electronic copy available at: https://ssrn.com/abstract=2551713

Enterprises are working in a vibrant manner and the majority of them are under performing and
on the other side in some companies Government is making disinvestment that is withdrawing
the investment away from the company under various sectors. In this situation, it obviously
necessities the study of financial statements of such companies to assess whether companies are
reporting such vibrant position through the help of Earnings Management practice while others
are falling year after year. Since, in most of the cases earnings management practice initiates
with a track record of success (Goel, 2012) because, once the company has reported substantial
revenue and incomes growing over recent years their stock price trades at high price but
unfortunately, it is becoming more problematic for the company to maintain the sales and
earnings growth as per the analysts’ expectations in the typical competitive market for longer
period, which finally compel the management to opt for manipulative accounting practices to
maintain their good image to the stakeholders. The Beneish M-Score Model (Beneish Model),
deployed as a financial forensic tool, can assist in evaluating the probability of earnings
manipulation in a company, as well as identifying areas that may require greater scrutiny.The
model had been applied to Enron and ZZZZ-Best for a specific year, prior to when the company
fraud was reported to the public (Warshavsky, 2012). Therefore, the forensic accountant can
deploy these findings to develop a roadmap for further investigation. The study of earnings
management in India has grown rapidly, especially since India has become a popular destination
for foreign investors.

From the available literature survey it is found that though there is numerous study on
Earnings Management has been done in western countries but in the context of an Indian
economic scenario very few study have been conducted in this field. Again, very little or no
study has been found in the context of Public Enterprises in India, against this background the
present study shall attempt to explore the nature of Earnings Management practice carried out in
Public Sector companies in different sectors in India.

The Objective of the Study:The main aim of the study is to review and analyze the earnings
management practices of public enterprises in India. It specifically aims to:

I. To evaluate the relationship between Earnings Management practices and Financial

Performance of Public sector companies in India.

Electronic copy available at: https://ssrn.com/abstract=2551713

 II. To compare the Earnings Management practice among the selected industry and to assess
whether any differences exist in variability predicting benchmark in different industry in
terms of earnings management practices of public enterprises in India.
III. To identify the red signals of selected public enterprises and to uncover whether they
engage in managing earnings while reporting the financial statements.

Data and Methodology

In this study a sample of twenty five companies was taken from four industries viz;
Mining, Power Generation, Petroleum and Transport Service. Manufacturing, Service, Electricity
and Mining for consideration. For the present study data have been collected for eleven years
period starting from the financial year 2002-03 to 2012-13 in connection with the 25 public
enterprises viz: Bharat Coking Coal Ltd.(BCCL), Central Coalfields Ltd (CFL), Coal India Ltd
(CIL), Eastern Coalfields Ltd (ECL), Western Coalfields Ltd (WCL), Northern Coalfields Ltd
(NCL), South Eastern Coalfield Ltd (SECL), Mahanadi Coalfields Ltd (MCL), Dredging
Corporation of India Ltd (DCIL), Shipping Corporation of India Ltd (SCIL), Pawan Hans
Helicopters Ltd (PHHL), Container Corporation of India Ltd (CCIL), Airport Authority of India
Ltd (AAIL), Ennore Port Ltd (EPL), NHPC Ltd (NHPCL), North Eastern Electric Power
Corporation Ltd (NEEPCL), Neyveli Lignite Corporation Ltd (NLCL), Satluj Jal Vidyut Nigam
Ltd (SJVNL), NHDC Ltd (NHDCL), Bharat Petroleum Corporation Ltd (BPCL), Chennai
Petroleum Corporation Ltd (CPCL), Gas Authority of India Ltd (GAIL), Hindustan Petroleum
Corporation Ltd (HPCL), Indian Oil Corporation Ltd (IOCL), Mangalore Refinery and
Petrochemical Ltd (MRPL) from their respective financial statements published by the
Department of Public Enterprise, Government of India. Keeping in view the nature of the present
study, the main data used is secondary in natures which were explored from published financial
statements. Out of various techniques developed for detecting earnings management, in this
study by following the (Maria, 2011); (Kaur et al, 2014); and (Warshavsky, 2012), Beneish M-
Score Model has been used for predicting the earnings management practice carried out by
management. As the last three variables such as SGAI, LVGI and TATA were not statistically
significant in the original Beneish model in this study M-Score five variables model is
calculated. The M-score is calculated using the coefficients in Beneish’s models. The five
variables and M-score for each company were compared with benchmarks set by Beneish
(1999). These benchmarks identified whether a company was managing its earnings while
reporting the financial statements. A M-Score of less -2.76 (for five variables) recommends that
the company is not likely to be engaged in earnings management and reverse will happen in case

Electronic copy available at: https://ssrn.com/abstract=2551713

of value of score beyond the stated value. In this model current financial year denoted by ‘p’ and
the prior year was denoted as ‘p-1’. With a view to correlate the extent of earnings management
practice with financial performance we have taken liquidity, profitability and fixed assets
turnover ratiosas a financial performance indicator. Due to the dissimilarity in the reporting
standard in India in comparison to western countries the model has been used with little
modification in order to keep conformity with Revised Schedule VI as follows: Cash and bank
have been used in place of cash, instead of sales and general expenses other expenses are
used.To conclude, the study will use the non-parametric H-Test to investigate the M-Score of
the twenty four enterprises during the last eight years to see if all these values have the
equivalent strength of the signal or not.
The hypotheses of the present study are as follows:

H01: There is no significant difference in the variability predicting benchmark (M Scores Index)
in different industry in terms of earnings management practices of public enterprises in
India.
HA1: There is significant difference exist in the variability predicting benchmark (M Scores
Index) in different industry in terms of earnings management practices of public enterprises
in India.
H02: Public enterprises in India with strong profitability signals generally do not engage in
managing its earnings while reporting the financial statements.
HA2: Public enterprises in India with strong profitability signals generally do engage in
managing its earnings while reporting the financial statements.

Analysis and Results

One of the most useful techniques revealing anomalies in financial statement information
is analysis of financial statement metrics. As an opening, we search an answer of our conceptual
research question that the financial records are not always entirely conclusive for all transactions
and that there may reveal anomalies in financial statement information through basic preliminary
investigative tools, namely inferences on liquidity, profitability and operations; with the help of
ratio red flags before applying more enhanced tools and techniques that drill- down to specific
areas for detailed investigations. The findings will provide a roadmap to zoom-in where

Electronic copy available at: https://ssrn.com/abstract=2551713

anomalies exist in the financial information that may indicate possible material misstatement due
to error or deception and to focus further investigative work in specific areas.

PROFITIBILTY
Mining Industry Petroleum Industry Power Industry Transportion Industry

30.00

20.00

10.00

0.00
2012-13 2011-12 2010-11 2009-10 2008-09 2007-08 2006-07 2005-06 2004-05 2003-04 2002-03

Figure-1:the profitability position during the study period.

From the above Figure 1 it is evident that the tendency of the profitability position of
Transportation Industry and Petroleum Industry has been declined sharply during the study
period, but the scenario in case of Mining and Power Industry the scenario just reverses where
profitability position for both of these industries have upsurges over the years subject to the huge
fluctuation in the case of the Mining Industry. Moreover, the absolute average profitability of
Mining and Power Industry were higher over and above the rest two Industries under study over
the last four years, i.e. recently the Mining and Power Industry has shown the massive
improvement in the profitability position.

LIQUIDITY POSITION
Mining Industry Petroleum Industry Power Industry Transportion Industry

3.00
2.50
2.00
1.50
1.00
0.50
0.00
2012-13 2011-12 2010-11 2009-10 2008-09 2007-08 2006-07 2005-06 2004-05 2003-04 2002-03

Figure-2: the liquidity position during the period.

Electronic copy available at: https://ssrn.com/abstract=2551713

From the above Figure 2 it is evident that the liquidity position of Petroleum and Power Industry
had declined over the study period with massive upward and downward movement during the
study period. So far mining industry is concerned, there was a substantial improvement in the
liquidity position subject to the enormous fluctuation during the study period and in case of
transportation industry there is a little improvement over the years with huge upward and
downward movement during the study period. Furthermore, it is clear that the Transportation and
Power Industry has maintained the highest level of liquidity throughout the study period as
comparedto Mining and Power Industry.

FIXED ASSETS TURNOVER POSITION

Mining Industry Petroleum Industry Power Industry Transportion Industry

8.00
6.00
4.00
2.00
0.00
2012-13 2011-12 2010-11 2009-10 2008-09 2007-08 2006-07 2005-06 2004-05 2003-04 2002-03

Figure-3: the fixed asset turnover position during the study period.

From the above Figure3 it is evident that the Power Industry has maintained the fixed assets
turnover ratio in a consistent manner during the study period. So far Mining and Transportation
Industry are concerned, it is found that there is little bit improvement in the fixed turnover ratio
over the study period. Finally, in case of Petroleum Industry there is a massive improvement in
this ratio subject to little fluctuation over the study period. Moreover, it is also evident that
Petroleum Industry maintained the highest level operational efficiency throughout the study
period, which is followed by Mining, and Transportation Industry. Power industry occupies the
first position from the least preference of turnover ratio.As there is huge inconsistency of
financial metrics in terms of Profitability, Liquidity, Capital Structure and Fixed Assets Turnover
so it inspired us to use drill down techniques to support the original test showing unusual
variations in the financial information with the M-Score.

Table 1: Summary Results showing M-Score of the companies during the study period

Electronic copy available at: https://ssrn.com/abstract=2551713

 2012-13 2011- 2010- 2009- 2008-09 2007- 2006- 2005- 2004- 2003-04 M-Score
12 11 10 08 07 06 05 %

SECL -1.40 -2.51 -2.95 -2.86 -3.29 -2.62 -3.35 -2.15 -3.33 -3.36 40.00
CCL -2.80 -2.50 -2.50 -3.80 -1.03 -2.81 -2.66 -3.65 -3.36 -2.47 50.00
CIL 139.24 NA NA -2.78 NA -4.15 -3.62 2.04 -3.90 -1.36 42.86
MCL -2.20 -1.82 0.46 -3.37 -2.97 -2.49 5.68 -3.71 -2.73 -3.69 60.00
BCCL -3.25 -0.58 -3.31 -14.99 -0.98 -3.71 -3.84 3.64 -3.41 -3.20 30.00
ECL -2.95 -3.32 -3.57 146.8 -2.93 -3.72 -4.27 -17.82 -3.26 -3.49 10.00
NCL -0.53 -2.95 -0.64 -2.46 -2.53 -2.99 -3.24 -2.79 -3.15 -2.90 40.00
WCL 24.06 -6.77 -3.96 -4.62 -5.69 -1.91 -2.33 -3.65 -3.05 -3.48 30.00
BPCL -3.59 -1.64 -3.62 -5.11 -6.42 -1.74 -3.83 -17.85 -1.10 -3.08 30.00
CPCL -4.05 35.53 -2.40 -5.01 -6.39 -2.93 -3.06 -1.87 -2.44 -3.12 40.00
GAIL -2.61 -2.69 -2.55 -3.11 -2.38 -2.84 -2.53 -2.99 -2.71 -2.98 60.00
HPCL -2.51 -2.55 -6.56 -1.42 -3.50 -1.29 -2.96 -3.89 -1.94 -3.34 50.00
IOCL -2.53 -2.59 -2.39 -3.79 -18.67 -5.28 -3.52 -5.73 -1.60 -2.98 40.00
MRPL -8.07 -1.80 -2.64 -2.29 -3.12 -2.57 -3.24 -0.81 -3.64 24.07 60.00
NEEPCL -2.90 -2.28 -0.87 -3.37 -3.24 -2.56 -1.84 -3.24 -3.51 -12.61 40.00
NHDCL -3.09 -3.08 -3.56 -2.72 -2.95 -2.62 -1.87 -1.95 2.26 NA 55.56
NHPCL -2.79 0.87 -3.80 -1.78 -3.45 -0.71 -2.54 -3.45 -3.66 -1.51 50.00
NLCL -2.91 -2.41 -2.78 -2.60 0.10 -2.43 -2.95 -2.46 -3.02 -3.04 30.00
SJVNL -3.18 1.03 -3.41 -3.41 -1.52 -3.11 -3.60 -0.47 -2.99 NA 33.33
AAIL -2.69 -2.44 -2.93 -2.46 -2.43 -3.12 -2.35 -3.24 1.37 -2.94 60.00
CCIL -2.63 -2.77 -2.94 -2.77 -2.82 -2.52 -2.84 -2.50 NA NA 37.50
DCIL -3.35 1.69 -3.10 -6.09 -4.69 -1.59 -2.72 -2.62 NA NA 50.00
EPL -2.91 -2.28 -2.24 -2.71 -2.12 -1.04 -0.43 -0.25 NA NA 87.50
PHHL -3.89 -8.08 -2.76 -3.04 -4.14 3.42 -3.77 30.01 NA NA 25.00
SCIL -2.50 -3.60 -3.58 8.25 -2.92 -2.65 -2.18 -2.70 NA NA 62.50

From the above Table 1 it is evident that the highest earning management practice is followed by
EPL whereas ECL has found to be least practitioner during the study period. In this table it is
also found that out of twenty five companies seven companies are involved in earnings
management practice for more than fifty percent cases during the study period again, it can also
be visible that except two companies such as EPL and SICL which are following earnings
management practice in 87.50 per cent and 62.50 per cent respectively and rest others are
detected as using earnings management tools in sixty per cent cases or less during the study
period. It is also clear that two high likelihood earnings manipulatorsare EPL and SICL, both
belong to service sectors. From the above table it is clear that when we consider the practices of

Electronic copy available at: https://ssrn.com/abstract=2551713

earnings management in terms of industry, it was found that highest position is occupied by
service industry followed by petroleum industry and then power generation and least practitioner
industry is mining industry which is also corroborated and revealed by (Kaur et all, 2014).

After a thorough discussion on the above tables it is found that Transportation Industry
has maintained the consistent financial performance during the study period and as per earnings
management is concerned, this industry has been detected as the highest earning management
practitioner during the study period among the four industries under. On the contrary, Mining
Industry has been detected as a lowest using earnings management practice during the study
period, but in this industry, there is no consistency in the financial performance as per the
indicators under study. The study also establishes that, the transportation industry maintained
the higher liquidity over the study period at the cost of profitability and the mining industry has
maintained the high level efficiency in terms of profitability at cost of liquidity. Furthermore, so
far industry wise earnings management practice is taken into consideration can be concluded that
in the case of industry specific study service industry holds the occupies the highest position in
terms of earnings management practice followed by petroleum industry, power generation and
mining industry holds first position from the least earnings management practice. The study
concluded that even though after maintaining the consistent financial performance in the
transportation industry it has been detected that among the four industries, transportation
industry was more prone to practicing the earnings management activity while reporting the
financial performance statements during the study period. But on the other hand rest three
industries under study does not maintain such consistency in the financial performance over the
study period as maintained in the transportation industry, but they are less prone to involve in the
earnings management practice as compared to transportation industry.

Finally, we used the independent sample, non-parametric H-Test to investigatethe M-

Score of the twenty four enterprises during the last eight years to see if all these values have the
equivalentstrength of the signal or not. Since the Chi-Square value with the M Score is
31.167with 23 degrees of freedom, and Asymp. Sig. Value is 0.119 which is much higher than
0.05 we cannot reject the null hypothesis and conclude that the evidence support our assumption
that there is no significant difference in the variability predicting benchmark (M Scores Index) in
different enterprise in terms of earnings management practices of public enterprises in India.

Electronic copy available at: https://ssrn.com/abstract=2551713

Conclusions

Finally,earnings management makes earning less reliable as a measure of a company’s

performance, if true earnings are manipulated there is possibility of cheating the stakeholders and
misappropriation of resources in an unhealthy manner. Therefore, in this study, we have used the
Beneish M-Score technique for detecting Earnings Management practice among the Public
Enterprises. Out of the 25 companies from four industries only ECL Company belongs to the
mining industry is found not using earnings management practice except one year out of ten
financial years. In this study maximum earnings management practice is detected in Service
industry, which is followed by petroleum industry and then, powergeneration industry and lastly
Mining industry was found lowest. Moreover, results derived using Beneish Model does not
necessarily provide the 100 percent guarantee about the earnings management practice, rather it
works as a red flag signal to Forensic Accountants and financial analysts for taking great care
and further analysis before any crucial decision in relation to the company. After all, the study
concludes that earnings management is the inescapable practice in Indian public sector
enterprises irrespective of the nature of the industry. Earnings management makes earnings less
reliable as a measure of company performance, if the true performance of the company is hidden,
there is potential for less efficient resource allocation decisions. We conclude that there is no
significant difference in the variability predicting benchmark in different enterprise during the
study period in terms of earnings management practices of public enterprises in India.This
findings will help financial forensic examiner in pinning down areas of financial information
relating to unusual variations or anomalies that necessitate further investigative work. Therefore,
it is necessary that the predominance of earnings management should be controlled by
constructing the effective accounting standards, changing the institutional arrangement of the
capital market, improving the legal system and reforming the economic and political system.

References:

Aboody, D. R., & Williams, M. (2000). Purchase versus pooling in a stock-for-stock acquisitions: Why
do firms care? Journal of Accounting and Economics, 29,3 (June), 261-286.
Ayers, B. C., & Robinson, J. R. (2002). Do firms purchase the pooling method? Review of Accounting
Studies, 7,1 (March), 5-32.

Electronic copy available at: https://ssrn.com/abstract=2551713

Bartov, E. (1993). The timing of asset sales and earnings manipulation. The Accounting Review,68,4
(October), 840-855.
Baber, W. R., & Haggard, J. A. (1991). The effect of concern about reported income on discretionary
spending decisions: THe case of research and development. The Accounting Review, 66, 4
(October), 818-829.
Bradshaw, M. T., & Sloan, R. G. (2002). GAAP versus the street: An empirical assessmentof two
alternative definitions of earnings. Journal of Accounting Research,40,1 (March), 41-66.
Beneish, M. D. (1991). The detection of earnings manipulation. Financial Analysts Journal, 55 (5), 24-36.
Beneish, M. D. (2001). Earnings Management: Prespective. Managerial Finance, 27 (12), 3-17.
Bens, D. V., & Wong, F. (2002). Real investment implications of employee stock option exercise. Journal
of Accounting Research, 40,2 (May) , 359-393.
Bhattacharya, N. N., & Mergenthaler, R. D. (2007). Empirical evidence on recent trends in pro forma
reporting. Accounting Horizons, 18, 1 (march) , 27-43.
Bhattachariya, N. N., & Larson, C. R. (2003). Assessing the relative informativeness and performance of
pro forma earnings and GAAP operating earnings. Journal of Accounting and Economics, 36, 1-3
(December) , 285-319.
Butler, M. A., & Weiss, I. s. (2007). The effect of reporting frequency on the timeliness of earnings: The
cases of voluntary and mandatory interim reports. Journal of Accounting and Economics, 43, 2-3
(July) , 181-217.
Bushee, B. J. (1998). The influence of institutional investors on myopic R&D investment behavior. The
Accounting Review, 73, 3 (July) , 305-333.
Coffee, J. C. (2005). A Theory of Corporate Scandals: Why the U S and Europe Differ Varda(?). Oxford
Review of Economic Policy, 21, 2 , 198-211.
Darrough, M. N., & Rangan, S. (2005). Do insiders manipulate earnings when they sell their shares in an
initial public offering? Journal of Accounting Research,43, 1 (March) , 1-33.
Demski, J. S., Patell, J. M., & Wolfson, M. A. (1984). Decentralized Choice of Monitoring Systems. The
Accounting Review, 59, 1, 16-34.
Demski, J. S. (2002). Enron et al-A Comment. Journal of Accounting and Public Policy, 21,2 (Summer),
129-130.
Doyle, J. T., & Soliman, M. T. (2003). The predictive value of expenses excluded from pro forma
earnings. Review of Accounting Studies, 8, 2-3 (June-September) , 145-174.
Erickson, G. M., & Mbagwu, C. (2004). How much will firms pay for earnings that do not exist?
Evidence of taxes paid on allegedly fraudulent earnings. The Accounting Review,79,2., 387-408.
Fields, T. D., Lys, T. Z., & Vincent, L. (2001). Empirical Research on Accounting Choice. Journal of
Accounting and Economics, 31, 1-3, 255-307.
Goel, S. (2012). Demystifying Earnings Management Through Accruals Management: An Indian
Corporate Study. VIKALPA, 37, 1, 49-56.
Gu, Z., & Chen, T. (2004). Analysts' treatment of nonrecurring items in street earnings. Journal of
Accounting and Economics, 38, 1-3 (December) , 129-170.
Healy, P. M., & Wahlen, J. M. (1999). A review of the earnings management literature and its
implications for standard setting. Accounting Horizons, 13, 365–383.

Electronic copy available at: https://ssrn.com/abstract=2551713

Healy, P., & Palepu, K. G. (2003). The Fall of Enron. Journal of Economic Perspectives, 17,2 (Spring) ,
3-26.
Hansen, G. S., & Hill, C. W. (1991). Are institutional investors myopic? A timeseries study of four
technology-driven industries. Strategic Management Journal, 12,1 (January) , 1-16.
Kassem, R. (2012). Earnings Management and Financial Reporting Fraud: Can External Auditors Spot
the Difference? American Journal of Business and Management, 1, 30-33.
Kaur, R., Sharma, K., & Khanna, A. (2014). Detecting Earnings Management in India: A sector-wise
study. European Journal of Business and Management, 6, 11, 11-18.
Levitt, A. J. (1998). The Number Game. The CPA Journal, 68, 12, 14-19.
Mahdi, S., & Ali, M. (2009). Firm Size, Audit Regulation and Fraud Detection: Empirical Evidence from
Iran. Management, 4, 1, 5-19.
Marquardt, C. A., & Wiedman, C. I. (2005). Earnings management through transaction structuring:
COntingent convertible debt and diluted EPS. Journal of Accounting Research, 43,2 (May) , 205-
243.
Maria , L. R. (2011). Financial Statement Fraud Detection Using Ratio and Digital Analysis. Journal of
Leadership, Accountability and Ethics, 8, 4, 56-66.
Monem, R. M. (2013). Earnings Management in Response to the Introduction of the Australian Gold Tax.
Contemporary Accounting Research , 20,4, 749-774.
Muller, K. A. (1999). An examination of the voluntary recognition of acquired brand names in the United
Kingdom. Journal of Accounting and Economics, 26, 1-3 (January) , 179-191.
Nichols, N. S., & Street, D. L. (2005). Pro forma adjustments to GAAP earnings: An analysis of specific
adjustments, materiality, and SEC action. Research in Accounting Regulation,18, 29-52.
Noronha, C., Zeng, Y., & Vinten , G. (2008). Earnings management in China: an exploratory study.
Managerial Auditing Journal, 23, 4, 367 - 385.
Omar, N., Koya, R. K., Sanusi, Z. M., & Shafie, N. A. (2014). Financial Statement Fraud: A Case
Examination Using Beneish Model and Ratio Analysis. International Journal of Trade,
Economics and Finance, 5, 2, 184-186.
Patricia, M. D., Richard, G. S., & Amy, P. S. (1995). Detecting Earnings Management. The Accounting
Review, 70, 2, 193-225.
Perols, J. L., & Lougee, B. A. (2011). The Relation Between Earnings Management and Financial
Statement Fraud. Advances in Accounting, 27, 1, 39-53.
Rocco, R. V. (1998). Fraud Auditing. Managerial Auditing Journal, 13, 1, 4-71.
Ronen, J. (2002). Post-Enron Reform: Financial Statement Insurance, and GAAP Revisited. Stanford
Journal of Law, Business & Finance, 8, 1 (Autumn) , 1-30.
Ronen, J., & Yaari, V. L. (2007). Demand for the Truth in Principal-Agent Relationships . Review of
Accounting Studies, 12, 1 (March) , 125-153.
Roychowdhury, S. (2006). Earnings management through real activities manipulation. Journal of
Accounting and Economics, 42, 3 (December) , 335-370.
Sankar, M. R., & Subramanyam, K. R. (2001). Reporting Discretion and Private Information
Communication through Earnings. Journal of Accounting Research, 39, 2, 365-386.
Schipper, K. (1989). Commentary: Earnings Management. Accounting Horizons, 3, 4, 91-102.

Electronic copy available at: https://ssrn.com/abstract=2551713

Sun, L., & Rath, S. (2009). An Empirical Analysis of Earnings Management in Australia. International
Journal of Social, Management, Economics and Business Engineering, 3, 7, 305-321.
Monem, R. M. (2013). Earnings Management in Response to the Introduction of the Australian Gold Tax.
Contemporary Accounting Research, 20, 4, 749-774.
Fields, D., Lys, Z., & Vincent, L. (2001). Empirical Research on Accounting Choice. Journal of
Accounting and Economics, 31, 255-307.
Warshavsky, M. (2012). Analyzing Earnings Quality as a Financial Forensic Tool. Financial Valuation
and Litigation Expet, 39, 16-20.

Electronic copy available at: https://ssrn.com/abstract=2551713