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Real earnings management and financial statement fraud: evidence from Malaysia

Real earnings management and financial statement fraud: evidence from Malaysia PurposeWe examine whether the fraud firms are engaged in real earnings management and accrual earnings management prior to the fraud year in the Malaysian context.Design/methodology/approachOur sample comprises of 65 financial statement fraud and 65 non-fraud firms over a period of eight years from 2001 to 2008.FindingsUsing the abnormal cash flow from operations (CFO) and abnormal production costs as the proxies for real earnings management, we find that financial statement fraud firms engage in manipulating production costs during preceding two years of the fraud event. However, our results show that financial fraud firms engage in manipulating CFO prior to the fraud event. Additionally, we find that financial statement fraud firms prefer to manipulate earnings using accruals relative to real earnings prior to the fraud year.Originality/valueOur results demonstrate that real earnings management is more aggressive in financial statement fraud firms compared to the non-fraud firms in the four years prior to fraud. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png International Journal of Accounting and Information Management Emerald Publishing

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Publisher
Emerald Publishing
Copyright
Copyright © Emerald Group Publishing Limited
ISSN
1834-7649
DOI
10.1108/IJAIM-03-2017-0039
Publisher site
See Article on Publisher Site

Abstract

PurposeWe examine whether the fraud firms are engaged in real earnings management and accrual earnings management prior to the fraud year in the Malaysian context.Design/methodology/approachOur sample comprises of 65 financial statement fraud and 65 non-fraud firms over a period of eight years from 2001 to 2008.FindingsUsing the abnormal cash flow from operations (CFO) and abnormal production costs as the proxies for real earnings management, we find that financial statement fraud firms engage in manipulating production costs during preceding two years of the fraud event. However, our results show that financial fraud firms engage in manipulating CFO prior to the fraud event. Additionally, we find that financial statement fraud firms prefer to manipulate earnings using accruals relative to real earnings prior to the fraud year.Originality/valueOur results demonstrate that real earnings management is more aggressive in financial statement fraud firms compared to the non-fraud firms in the four years prior to fraud.

Journal

International Journal of Accounting and Information ManagementEmerald Publishing

Published: Oct 1, 2018

References

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