Evaluating Earnings Management in Financial Institutions

Most companies listed on the S&P 500 index have smoothed reported earnings since the 1990s inspiring questions from regulators about the accuracy of financial statements. In 2002, the Sarbanes-Oxley Act (SOX) was issued to eradicate earnings management activities and improve transparency in financial reporting. Although many studies have been conducted to evaluate changes in reporting requirements [2], much less is known about the effectiveness of these regulations on earning smoothing with discretionary accruals. Accordingly, this study was an investigation of discretionary accruals for the period 2002 through 2011. In addition, this study included an evaluation of discretionary accruals before and after the financial crisis of 2008. This study is a quasi-experimental research design where 330 observations from the U.S. financial industry segment were used in this analysis. The modified Jones model was used to separate discretionary accruals and repeated measures analyses of variance were used to assess differences in levels before and after the financial crisis of 2008. The findings suggest discretionary accrual activities are decreasing but represent over 50% of total net accruals for all years. Improved financial regulation is needed. The study contributes to positive social change by providing regulators and investors with new information about accruals for income conservative firms by segmenting discretionary accruals within the financial industry segment.