The extent to which earnings are manipulated has long been of interest to analysts, regulators, researchers, and other investment professionals. The U.S. SEC’s recent commitment to vigorous investigation of earnings manipulation (see Levitt 1998) has sparked renewed interest in the area, but the academic and professional literature contains little discussion of the detection of earnings manipulation....
This article presents a model to distinguish manipulated from nonmanipulated reporting....
Earnings manipulation is defined as an instance in which a company’s managers violate generally accepted accounting principles (GAAP) to favorably represent the company’s financial performance. To develop the model, I used financial statement data to construct variables that would capture the effects of manipulation and preconditions that might
prompt companies to engage in such activity.