Determinants of earnings management and their effects on the profitability, market, liquidity and activity ratios for publicly listed firms in the Philippines from 2008 to 2012

Income manipulation is a primary attribute associated with earnings management in which a company uses various techniques that generally seek to alter financial statement figures for the purpose of providing its stakeholders a comprehension or interpretation that favor its reputation. A degree of fraud can be paralleled with the management tool as the presentation of financial figures often devices stakeholders from various sectors. The deteriorating ability of financial statements to reflect transparency as to the financial standing of companies has prompted the researchers to identify what particular accounts contribute to discretionary accruals and how the latter affects the financial ratios. In pursuing the ultimate goal of the study, the sample size of all publicly listed companies in the Philippines from 2008 to 2012, other than financial institutions and service-oriented business, have been identified through scientific procedures undertaken by the researchers. First, the discretionary accruals using the modified Jones model was computed. This is then followed by panel regressions subjected to various statistical tests to determine the optimal models. Finally, simultaneous equation model (SEM) was conducted to make sense of the relationship of the discretionary accruals to the financial ratios. Statistical results obtained from this study has yielded that accounts receivable, net financial assets, salary expense, property , plant and equipment, long-term debt, and inventory significantly impact the discretionary accruals. As the effect of the 2nd step, discretionary accruals was speculated to have a significant impact on inventory turnover ratio only. Consequently after the simultaneous equation model, it was found that all of the above mentioned accounts besides net financial assets have a significant effect on inventory turnover