When Justice Is Served: Using Data Analytics To Examine How Fraud-Based Legal Actions Affect Earnings Management

Abstract

To investigate the possibility that corporate managers change their discretionary accrual policies in response to federal legal decisions, a discretionary accrual model was formulated. Specifically, this model tests whether the magnitude of an entity’s discretionary accruals increases or decreases after the filing of fraud-based legal actions and the issuance of fraud-based legal rulings. The results indicate that overall, the magnitude of an entity’s discretionary accruals: (1) increases in response to the filing of a fraud-based legal action; (2) decreases in response to the issuance of a favorable fraud-based legal ruling; (3) increases in response to the issuance of an unfavorable fraud-based legal ruling; (4) decreases in response to the issuance of a mixed fraud-based legal ruling; and (5) changes according to industry factors in response to the issuance of a fraud-based legal ruling.

Keywords: Earnings Management, Fraud Litigation, Discretionary Accruals, Accounting Data Analytics, Legal Analytics