Earnings management during the global financial crisis: evidence from Australia

This paper examines if Australian firms engaged in a higher level of earnings management during the global financial crisis (GFC) and if there was any industry effect on firms’ earnings management. During financial crises many firms experience a systematic decline in incomes, and majority of them report a fall in earnings or losses. The onset of a financial crisis may, therefore, trigger or magnify managerial motives to engage in earnings management, attributing the reduced earnings (or losses) to the macroeconomic shocks rather than to poor managerial performance. Earnings management has been defined in terms of the discretionary components of total accruals. We use parametric and non-parametric tests and panel data regression methods to analyse the impact of the GFC and industry effect on the discretionary accruals sample comprised of 149 Australian firms during the 2006 to 2009 period. We find that Australian firms engaged in a higher level of income-decreasing earnings management during the GFC. This finding is consistent with that of earlier research in the Asian Financial Crisis context. We also find that firms’ industry classification has statistically significant effect on their earnings management.