Detection of Earnings Management: The Best Fit Model in India

Financial reporting is the communication of economic information of a corporate to various decision makers. The responsibility for preparing and furnishing this accounting information lies with the firms' managers. On account of information asymmetry between managers and external users, it allows managers to use their discretion in preparing and reporting accounting information for their own advantage. It has been proved both empirically and otherwise that managers use their discretion in accounting numbers for meeting a predetermined target. This practice is commonly known as earnings management. This study analyses the earnings management practices in select corporate enterprises in India and contributes by categorizing them by intensity of discretion exercised in financial accounting. Three major earnings management models have been used in this process for a period from 2007 to 2011 in order to find out the best fit model in Indian perspective. The reason being is these models have been primarily used in west. After data analysis, Healy model emerges as the most consistent model for these companies.