Earnings Management, Analysts’ Earnings Forecasts And Risk Of Material Misstatement

Material misstatement of accounting information could mislead numerousinvestors, creditors and other stakeholders, force them to make the incorrect decisionsand result in serious economic losses. Therefore, it has great realistic significance toreduce the risk of material misstatement of accounting information. For one thing, riskof material misstatement is bound up with many factors and improper earningsmanagement behavior is an important one. For another, as a capital market participant,securities analysts may inhibit or induce improper earnings management byforecasting earnings of companies, thus weakening or strengthening the risk ofmaterial misstatement. Risk of material misstatement refers to the possibility ofmaterial misstatement in accounting information having been audited by theindependent auditors and disclosed by the company management. While earningsmanagement is a kind of neutral act, under certain conditions, improper earningsmanagement could result in material misstatements of accounting information.Basing on the data of A-share List Companies from2008to2013, the writeremployed he Logistic Model to research into the connection between earningsmanagement and the risk of material misstatement and into the question that whetheranalysts’ earnings forecast would strengthen or weaken the correlation between theabove two subjects. Not only this paper studied the correlation between earningsmanagement and risk of material misstatement using total samples, but also dividedthe samples into two groups according to the median of earnings management foreach industry, then studies the correlation respectively. The study found that thebigger the overall size of earnings management, the greater the possibility of risk ofmaterial misstatement of the financial report. After dividing the samples, the writer found that for the companies who are above the average earnings management, thereis a positive correlation between earnings management and risk of materialmisstatement significant, while the correlation is not significant for the other group.Taking securities analysts into consideration, this paper found that rely onprofessional financial knowledge, strong ability to interpret information, convenientsource of information and a wealth of information dissemination channels, analystscould pass high-quality information to stock market, monitor management andweaken risk of material misstatement due to improper earnings management, andimprove the quality of accounting information.This paper is divided into six parts, and the first part is an introduction. This partdescribes the background, significance and a framework of this paper. The second partsummarized the relevant researches on earnings management and the risk of materialmisstatement, as well as analysts’ forecast and earnings management, to determine theresearch direction and method. In part three the author used the Fraud Triangle andstakeholder theory to point out the relationship between earnings management,analysts’ forecast and the risk of material misstatement, then proposed the hypothesisof this paper. The fourth part of this article selected the appropriate research variablesand control variables, and built the logistic regression model in this paper. The fifthsection performed descriptive statistical analysis, correlation analysis，independent-samples T test and logistic regression analysis of the variables in ourmodels to find out the relationship between earnings management, analysts’ forecastand the risk of material misstatement, then used robustness test to determine thereliability of the study. The sixth part drew the final conclusions of the study,proposed appropriate policy recommendations and prospects for future research.The main contribution of this paper is: In the first place, according to the medianlevel of earnings management for each sector, the total samples are divided into twogroups: the first group is composed of companies whose earnings management levelare above the industry median, and the second group consists of the remainingcompanies. The result shows that earnings management behavior is more likely to lead to risk of material misstatement for the companies conduct more earningsmanagement. In the second place, this paper examined the impact of externalstakeholders on the correlation between earnings management and the risk of materialmisstatement, taking securities analysts for an instance. The writer found thatsecurities analysts do play an inhibitory action in risk of material misstatement due toimproper earnings management.