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FRISAM-Fri prosjektstøtte samfunnsvitenskap

Earnings Management and Methods for identifying such activities

Awarded: NOK 2.2 mill.

Earnings management (EM) occurs when managers use non-objective judgment in financial reporting. The most of the judgment is concealed, and the prevailing research methods of identifying EM are still not adequate. Various models for estimating the discret ionary accruals have dominated the literature. The problem lies in estimating the non-discretionary accruals. Leading researchers have lately recommended focusing on narrower settings where modeling opportunities are richer. This may mean modeling accrual s in particular industries or modeling particular components of accruals. The Fish Farming Industry seems well suited for studies of EM. Firms in this industry are exceptionally homogenous in most respects. First, they produce standard commodities for the international fish markets, and no firm has pricing power. Secondly, all firms use the same production technology. One accrual dominates. The living fish stocks, which represent the most obvious tool for managing earnings, account for as much as 50 % of the balance sheet value. The industry also has great commercial significance. I collect a unique and comprehensive dataset (150-200 firms each year from 1988 to 2004). The uniqueness lies in the production data (not disclosed in annual reports). I outline direct models for revealing EM utilizing these data. The method is much more accurate than the accrual models. Four research topics are proposed: (I) Study of earnings management throughout time in a homogenous industry (Fish Farming). To my knowledge, i t's never been done in any industry before (II) Developing and testing accrual models in real settings. To my knowledge, this is the first study not based on artificially induced EM (III) What are the consequences of EM in the Fish Farming Industry? (I V) Testing proposed hypotheses in samples of firms outside the Fish Farming Industry. The results from this study will be useful for investors, creditors, auditors and for the legislative authorities.

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FRISAM-Fri prosjektstøtte samfunnsvitenskap

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