Abstract:
Stream of literature on earnings management highlighted managers' opportunistic behavior
to manipulate financial information with the view of extracting numerous unethical benefits.
The purpose of this study is to investigate whether earnings manipulation exists in Sri Lanka
as fabricating earnings which adversely triggers to the economy as a whole. We utilized
Beneish model in our study as this model is a widely accepted, successful and important fraud
sensitive indicator in detecting earnings manipulation under specific accruals method. As the
sample, we considered twenty listed firms from Colombo Stock Exchange (CSE) for the period
of 2013 to 2017 on quarterly basis. Days Receivable Index (DSRI), Gross Margin Index
(GMI), Asset Quality Index (AQI), Sales Growth Index (SGI), Depreciation Index (DEPI),
Sales General and Admin Expense Index (SGAI), Leverage Index (LVGI) and Total Accruals
to Total Asset Index (TATA) were used to calculate the M-Score of the model which determines
the susceptible companies where earnings manipulation could exist. Results, reveals that
earnings manipulation exists in the entities listed on CSE at different degrees based on
financial structure of such companies operating in different sectors. Our findings facilitate
regulatory authorities to enhance effectiveness of standard-setting and monitoring to
eliminate dodges where earnings could be manipulated. In addition, the study contributes to
the knowledge base of academics and policymakers to make effective economic decisions.
