Earnings management in the construction industry

Abstract

We find that the existing accounting standards, which mandate the firms in the Construction Industry to follow the Percentage of Completion Method in order to recognize revenue, aid the management in managing earnings. We test for earnings management using the “Unbilled Revenue” accrual and find evidence of earnings management when tested against two incentives/pressures, namely meeting/beating zero earnings benchmark and avoiding violation of debt covenant pressures. The results of this paper hold implications for the standard setters in improving the accounting process with a view to control the managerial discretion that is allowed in the process.