Accounting Manipulation of Financially Distressed Firms: Malaysian Evidence

Mojtaba Shayan Nia; Aziatul Waznah Ghazali; Nur Aima Shafie; Zuraidah Mohd Sanusi; Rashidah Abdul Rahman

doi:10.47405/mjssh.v7i10.1799

Mojtaba Shayan Nia Faculty of Management and Accounting, University of Eyvanakey, Daneshgah Street, Ayatollah Taleghani Blvd, EyvaneKey, Iran.
Aziatul Waznah Ghazali Faculty of Economics and Management, Universiti Kebangsaan Malaysia, 43600 UKM, Bangi Selangor, Malaysia.
Nur Aima Shafie Accounting Research Institute (ARI), Level 12, Menara Menara Sultan Abdul Aziz Shah (SAAS), Universiti Teknologi MARA, 40450 Shah Alam, Selangor, Malaysia.
Zuraidah Mohd Sanusi Accounting Research Institute (ARI), Level 12, Menara Menara Sultan Abdul Aziz Shah (SAAS), Universiti Teknologi MARA, 40450 Shah Alam, Selangor, Malaysia.
Rashidah Abdul Rahman College of Business Admnistration, King Abdul Aziz University, Jeddah 22254, Saudi Arabia.

DOI: https://doi.org/10.47405/mjssh.v7i10.1799

Keywords: Financial Distress, Real Activities Manipulation, Earnings Management, Accounting Manipulation, Deteriorating Financial, Performance

Abstract

Firms approaching deterioration in financial performance may make income-increasing accounting choices in an attempt to survive what is probably deemed by the management as a temporary bad period. This study attempts to empirically examine real activities-based earnings manipulation among financially troubled firms in Malaysia over the years prior and after being officially designated as a “financially distressed firm.” The study detects real activities manipulation by investigating patterns in cash flow from operations (CFO), discretionary expenses, and production costs. Results reveal that CFO and discretionary expenses are unusually low for the years preceding the official designation as a financially distressed firm. This evidence suggests that distressed firms temporarily increase sales and reduce discretionary expenditures to improve reported margins. Moreover, having likely exhausted the opportunities for accounting manipulation, distressed firms manipulate real activities, such as sales and discretionary expenditures, highly aggressively in the years after being identified as a financially distressed firm. This study contributes to literature by going beyond the examination of abnormal accruals derived from accruals models to gain insight into the measurement of operational elements of income rather than the implementation effects of the accounting system.

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