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Detecting Creative Accounting Practices: A Regression Analysis of Earnings Management in Publicly Traded Companies

Prof. Khalid Hamad Alturki

Abstract

This study investigates the relationship between various financial indicators and creative accounting practices in publicly traded companies. Using a sample of 500 firms from the S&P 1500 over a five-year period (2018-2022), we employ multiple regression analysis to identify key predictors of earnings management behavior. Our dependent variable is the discretionary accruals ratio, calculated using the Modified Jones Model, while independent variables include firm size, leverage, profitability, audit quality, and corporate governance metrics. The results reveal that highly leveraged firms with weak governance structures are significantly more likely to engage in creative accounting practices. Specifically, we find that a one-standard-deviation increase in leverage ratio is associated with a 0.23 increase in discretionary accruals (p < 0.01). Conversely, the presence of Big Four auditors and independent boards reduces earnings management behavior by approximately 18% and 15%, respectively. These findings have important implications for regulators, investors, and audit committees in identifying and preventing financial manipulation.

Keywords

Creative accountingearnings managementdiscretionary accrualsregression analysiscorporate governancefinancial fraud detection

References

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