Abstract
Purpose - The purpose of this paper is to determine whether earnings management is related to the incidence of fraud and the amount of misappropriated assets. By examining the research question, this study improves our understanding of using the accrual basis of accounting in identifying the misappropriation of assets.Design/methodology/approach - This study analyzes 173 sample firms in Korea that announced asset misappropriations in the period from 2006 to 2010. The study utilizes logistic and linear regressions to test the hypothetical relations set up in the study using discretionary accruals as a proxy of the earnings management. Additionally, we performed the robustness test using estimated accruals as a supplementary proxy of the earnings management.Findings - We find that misappropriation of assets has a significant positive association with discretionary accruals. Interestingly, this relationship only holds for firms with negative discretionary accruals. The results suggest that the accrual basis of accounting provides a clue towards uncovering management’s misappropriation of assets and thus plays an important role in reducing existing information asymmetry.Practical implications - Our findings would assist practitioners in detecting asset misappropriation through financial reporting quality, and investors and auditors should be more alert to negative discretionary accruals.Originality/value - There are some studies that examine asset misappropriation. However, most of them are focused on the relation between asset misappropriation and corporate governance. To the best of our knowledge, this is the first study that examines the association of financial reporting quality (i.e., discretionary accruals) and asset misappropriation. Our findings provide evidence of the usefulness of the accrual basis of accounting in detecting fraud and enhance the understanding of income-decreasing earnings management.
Purpose - The purpose of this paper is to determine whether earnings management is related to the incidence of fraud and the amount of misappropriated assets. By examining the research question, this study improves our understanding of using the accrual basis of accounting in identifying the misappropriation of assets.Design/methodology/approach - This study analyzes 173 sample firms in Korea that announced asset misappropriations in the period from 2006 to 2010. The study utilizes logistic and linear regressions to test the hypothetical relations set up in the study using discretionary accruals as a proxy of the earnings management. Additionally, we performed the robustness test using estimated accruals as a supplementary proxy of the earnings management.Findings - We find that misappropriation of assets has a significant positive association with discretionary accruals. Interestingly, this relationship only holds for firms with negative discretionary accruals. The results suggest that the accrual basis of accounting provides a clue towards uncovering management’s misappropriation of assets and thus plays an important role in reducing existing information asymmetry.Practical implications - Our findings would assist practitioners in detecting asset misappropriation through financial reporting quality, and investors and auditors should be more alert to negative discretionary accruals.Originality/value - There are some studies that examine asset misappropriation. However, most of them are focused on the relation between asset misappropriation and corporate governance. To the best of our knowledge, this is the first study that examines the association of financial reporting quality (i.e., discretionary accruals) and asset misappropriation. Our findings provide evidence of the usefulness of the accrual basis of accounting in detecting fraud and enhance the understanding of income-decreasing earnings management.