Detecting Earnings Management in the UK and China

Accounting information is useful for stakeholders to make decisions. Detecting earnings management using accounting information helps stakeholders know the true performance of companies. Even though there is much research related to earnings management in the UK and China, it seems that research which captures the associations between accounting variables and earnings management in the two countries are underdeveloped. Inspired by this gap, this research aims to find degrees of earnings manipulation and explore the relationship between accounting variables and earnings management in the UK and China. This research chooses manufacturing industry and uses the Beneish M-Score model to reveal earnings manipulation in the UK and China. Further, this research uses the fixed effects model to explore associations between accounting variables and earnings management in the UK and China respectively. The results show that in the UK, asset quality, sales growth and non-discretionary accruals are positively correlated to earnings management. The results also indicate that for companies in the UK, the higher the risk of asset realisation, the higher levels of earnings management. Increases in sales can also be an indicator for earnings management. Also, companies with higher non-discretionary accruals have the potential to engage in earnings management. The depreciation expenses, leverage and non-discretionary accruals are found to be positively correlated to earnings management in China. The results suggest that companies which slow depreciation expenses have the potential to manage earnings in China. Also, companies with high leverage have greater incentives to manage earnings. The sales, general and administrative expenses are negatively related to earnings management. These expenses can be manipulated to influence the performance of earnings in China