Evaluating Alternative Methods for Assessing Creative Accounting: Empirical Evidence from the Greek Financial Crisis

As a result of the severe financial crisis that Greece faced following the Memorandum of 2010, many enterprises devised creative accounting techniques to look more attractive to markets. Earnings management is one of the most popular of these. The primary objective of this research is to compare the effectiveness of various methods for detecting Earnings Management through Accruals manipulation. According to the (Jones, Journal of Accounting Research 29:193–228, 1991) methodology, as amended by (Dechow, P., Sloan, R., Sweeney, A., (1995) Detecting Earnings Management, The Accounting Review, 70(2), 193–225), Total Accruals is a function of enterprises revenues and fixed assets. A brief review of the literature is presented first. Following this is a presentation of alternative methods for evaluating earnings management. It is accompanied by a presentation of the sample data used, namely panel data for 114 Greek enterprises from 2006 to 2014 (i.e., four years before and four years after the signing of the Memorandum in 2010). Then, the critical results of the three estimated econometric models, namely pooled OLS, Fixed Effects, and Random Effects, are presented. The models are evaluated using the Breusch—Pagan Lagrange Multiplier test and the Hausman test. According to the results, the Random Effects Model provided a better fit for the Greek case studied. Furthermore, weighing the potential of alternative models against their limitations yielded practical implications for creative accounting assessment.