Evidence on earning management by integrated oil and gas companies

Abstract

The objective of this chapter is to demonstrate specific test methodology for detection of earnings management in the oil and gas industry. This study utilized several parametric and nonparametric statistical methods to test for such earnings management. The oil and gas industry was used given the earlier evidence where such firms manage earnings in order to ease the public view of the significant price swings that occur in oil and gas prices. In this chapter, our focus is on total accruals as the primary means of earnings management. The prevailing view is that total accruals account for a greater amount of earnings management and should be more readily detected. The model to be considered is the Jones model (Journal of Accounting Research 29, 193–228, 1991) which projects the expected level of discretionary accruals. By comparing actuals vs. projected accruals, we are able to compute the total unexpected accruals. Next, we correlate unexpected total accruals with several difficult to manipulate indicators that reflect company′s level of activities. The significant positive correlations between unexpected total accruals and these variables are an indication that oil and gas firms do not manage income before extraordinary items and discontinued operations. A second test is conducted by focusing on the possible use of special items to reduce reported net income by comparing mean levels of several special items pre–2008 and 2008. The test results indicate significant difference between 2008 means and the pre–2008 period.​