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Effectiveness of Earnings Management Control Mechanisms in India: A Diagnostic Study Using Structural Equation Modelling

The paper aims to analyse effectiveness of earnings management control mechanism in controlling earnings management activities in India. Specifically, effectiveness of corporate governance, external auditing and accounting standards in controlling earnings management practices are analysed. Primary data regarding auditor’s and accountant’s perception has been collected using structured questionnaire 205 respondents and analysed using descriptive statistics and Structural Equation modelling. The analysis shows that accrual based earnings management has significantly negative relationship with internal corporate governance, external audit and accounting standards. But real activity manipulations have significant negative relationship only with external audit. The findings of the research would pave a base for the regulators to strengthen the earnings anagement control mechanisms and other stakeholders could use the findings of the research to understand whether their interests in the companies are protected. This is the first study in India analysing auditors and accountants’ perception regarding accrual based earnings management practices and real activity manipulations and effectiveness of earnings management control mechanisms to the best of authors’ knowledge.