Financial crisis, GDP variation and earnings management in Europe

• What are the consequences of the financial crisis on European companies’ in relation to earnings management?
• Financially distressed companies that are audited by a big 4 auditor exhibit lower discretionary accruals.
• Greek and Spanish companies reduce earnings management manipulation during recession.
• Portuguese, Irish and Italian companies show mixed results and may encourage earnings management under certain conditions.

The purpose of this study is to examine the consequences of the financial crisis on the European companies’ in conjunction with earnings management practice. It focuses on financially distressed companies that audited by a big 4 auditor during recession years. The study makes use of discretionary accruals as a proxy for earnings management and studies the influence of big 4 auditor, in order to shed more light on possible causes for shifting earnings. The findings of the study provide evidence that financially distressed companies that audited by a big 4 auditor exhibit lower discretionary accruals. The results reveal that Greek and Spanish companies reduce earnings management manipulation during recession. In contrast, Portuguese, Irish and Italian companies show mixed results. They tend to reduce earnings management practices, but there are reasons that influence managers’ behavior to increase earnings management. The findings of this study can be useful for both investors and standard setting authorities.