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Real earnings management and financial statement fraud: evidence from Malaysia

Noorul Azwin binti Md Nasir (Faculty of Entrepreneurship and Business, Universiti Malaysia Kelantan, Pengkalan Chepa, Malaysia)
Muhammad Jahangir Ali (Department of Accounting, La Trobe University, Melbourne, Australia)
Rushdi M.R. Razzaque (Department of Accounting, Independent University, Dhaka, Bangladesh)
Kamran Ahmed (Department Accounting, La Trobe University, Melbourne, Australia)

International Journal of Accounting & Information Management

ISSN: 1834-7649

Article publication date: 1 October 2018

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Abstract

Purpose

We 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/approach

Our sample comprises of 65 financial statement fraud and 65 non-fraud firms over a period of eight years from 2001 to 2008.

Findings

Using 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/value

Our 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.

Keywords

Acknowledgements

The author would like to acknowledge helpful comments and suggestions from seminar participants of the Department of Accounting, La Trobe University. Any remaining errors are ours.

Citation

Md Nasir, N.A.b., Ali, M.J., Razzaque, R.M.R. and Ahmed, K. (2018), "Real earnings management and financial statement fraud: evidence from Malaysia", International Journal of Accounting & Information Management, Vol. 26 No. 4, pp. 508-526. https://doi.org/10.1108/IJAIM-03-2017-0039

Publisher

:

Emerald Publishing Limited

Copyright © 2018, Emerald Publishing Limited

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