Earnings management detection through budget execution. Insights from Greek municipalities

Abstract

PurposeThis study examines specific budget execution items (as proxies of vulnerability and sustainability) along with political factors to identify earnings management (EM) practices in Greek municipalities.Design/methodology/approachThe study employs a sample of 1,831 financial and budget execution statements for the period 2011–2019. EM is proxied by unsigned discretionary accruals that are assessed through the performance-matched modified-Jones model and the modified-Jones model.FindingsThe findings provide evidence that the municipality’s dependence on subsidies (or its self-sufficiency) affects EM, especially during the pre-election year. Municipalities that maintain their financial autonomy engage less in EM in pre-election years. Lastly, it is proven that electoral cycles, weak opposition and other variables exert an effect on the size of EM. Sensitivity analysis confirms the results.Originality/valueThis paper contributes to the literature on EM by analyzing for the first time budget execution items (as proxies of vulnerability and sustainability) and their impact on the size of unsigned discretionary accruals.