Identifying earnings management using changes in asset turnover and profit margin
Harebottle, Jodi Lee
This study assesses the ability of Jansen, Ramnath & Yohn (2012) diagnostic, which is based on the relationship between the change in the asset turnover ratio and profit margin ratio, to distinguish between those firms suspected of manipulating reported financial figures by means of earnings management (EM) and firms that have not attempted earnings management. The study aims to determine whether, as suggested by Jansen et al (2012), the change in the asset turnover ratio and profit margin ratio as well as the direction of the change, can potentially indicate EM. In addition, the study aims to determine whether this new, simplistic diagnostic is incrementally useful to discretionary accruals in identifying EM. The sample of suspected EM firms was obtained from a study conducted by Rabin & Negash (2012), using kernel density estimation (Lahr, 2014). The results of this research suggest that Jansen et al.’s (2012) diagnostic is a useful indicator for identifying firms that might have manipulated reported financial figures through the use of earnings management. The study however shows that, due to weaknesses in either the diagnostic, in that it is limited in its ability to identify EM through sales, or in the method used to obtain the sample, this diagnostic is not incrementally useful to discretionary accruals models in identifying EM. Instead it should be used in conjunction with other models.
A research report submitted to the SCHOOL OF ACCOUNTING Faculty of commerce, law and management University of the Witwatersrand In partial fulfilment of the requirements for the degree of Master of Commerce
Harebottle, Jodi Lee (2016) Identifying earnings management using changes in asset turnover and profit margin, University of the Witwatersrand, <http://hdl.handle.net/10539/21798>