How can data manipulation matter in predicting the failure risk? Evidence from Romanian companies
Abstract
Recent fraud scandals have raised concerns about the reliability of financial data disclosed in financial statements. The main purpose of this article is to investigate how financial data manipulation affects company failure risk. The research sample comprises 63 non-financial Romanian companies listed on the Bucharest Stock Exchange between 2015 and 2020. Three types of statistical methods were used to determine and consolidate the results. The results partially support the strand in literature according to which there is a correlation between manipulated data and failure risk. More specifically, the findings indicate that there is no statistically significant correlation between the Beneish Model and the Altman Z-score. However, after a more in-depth investigation taking into account the specific elements that indicate the existence of customized data in financial data, it was discovered that, among the eight Beneish model component variables, days' sales in a receivable index, sales growth index, and total accruals to total assets have a significant impact on the measurement of bankruptcy risk. This study constitutes an important contribution to the body of knowledge because it focuses not only on the relationship between the risk of failure and financial statement manipulation, but it examines also the significance of financial manipulation indicators in predicting the likelihood of bankruptcy. Our findings are valuable to decision makers seeking a deeper understanding of the reality behind financial data presented in financial statements.
Keyword : data manipulation, Beneish score, failure risk, Altman score, performance, accruals
How to Cite
Lucuţ Capraș, I., Achim, M. V., Hint, M. S., & Găban, L. V. (2025). How can data manipulation matter in predicting the failure risk? Evidence from Romanian companies. Journal of Business Economics and Management, 26(1), 110–126. https://doi.org/10.3846/jbem.2025.22373
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
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Cho, S., Fu, L., & Yu, Y. (2012). New risk analysis tools with accounting changes: Adjusted Z-score. Journal of Credit Risk, 8(1), 89–108. https://doi.org/10.21314/JCR.2012.137
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Fang Li, S. (2010), Determinants of management’s preferences for an earnings threshold, Review of Accounting and Finance, 9(1), 33–49. https://doi.org/10.1108/14757701011019808
Goh, E., Mat Roni, S., & Bannigidadmath, D. (2022). Thomas Cook(ed): Using Altman’s z-score analysis to examine predictors of financial bankruptcy in tourism and hospitality businesses. Asia Pacific Journal of Marketing and Logistics, 34(3), 475–487. https://doi.org/10.1108/APJML-02-2021-0126
Greene, W. G. (2008). Econometric analysis (6 ed.). Pearson International edition.
Grove, H., Cook, T., Streeper, E., & Throckmorton, G. (2010). Bankruptcy and Fraud Analysis: Shorting and selling stocks. Journal of Forensic and Investigative Accounting, 2(2), 276–293.
Jaggi, B., & Lee, P. (2002). Earnings management response to debt covenant violations and debt restructuring. Journal of Accounting, Auditing & Finance, 17(4), 295–324. https://doi.org/10.1177/0148558X0201700402
Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305–360. https://doi.org/10.1016/0304-405X(76)90026-X
Johnson, R., & Wichmen, D. (2020). Applied multivariate statistical analysis (6 ed.). Pearson Education.
Kassem, R., & Higson, A. (2012). Financial reporting fraud: are standards’ setters and external auditors doing enough? International Journal of Business and Social Science, 3(19), 283–290.
Koerniadi, H. (2023). Do firms manage earnings after a downgrade in their credit rating? Review of Accounting and Finance, 22(5), 602–619. https://doi.org/10.1108/RAF-10-2022-0299
Li, C., Lou, C., Luo, D., & Xing, K. (2021). Chinese corporate distress prediction using LASSO: The role of earnings management. International Review of Financial Analysis, 76, Article 101776. https://doi.org/10.1016/j.irfa.2021.101776
Lin, H.-W., Lo, H.-C., & Wu, R.-S. (2016). Modeling default prediction with earnings management. Pacific Basin Finance Journal, 40, 306–322. https://doi.org/10.1016/j.pacfin.2016.01.005
Mahama, M. (2015). Detecting corporate fraud and financial distress using the Altman and Beneish models. International Journal of Economics, Commerce and Management, 3(1), 1–18.
Musanovic, E. B., & Halilbegovic, S. (2021). Financial statement manipulation in failing small and medium-sized enterprises in Bosnia and Herzegovina. Journal of Eastern European and Central Asian Research, 8(4), 556–569. https://doi.org/10.15549/jeecar.v8i4.692
Nyakarimi, S. (2022) Probable earning manipulation and fraud in banking sector. Empirical study from East Africa. Cogent Economics & Finance, 10(1), Article 2083477. https://doi.org/10.1080/23322039.2022.2083477
Saji, T. G. (2018). Financial distress and stock market failures: Lessons from Indian realty sector. Vision, 22(1), 50–60. https://doi.org/10.1177/0972262917750244
Saleh, N., & Ahmed, K. (2005). Earnings management of distressed firms during debt renegotiation. Accounting and Business Research, 35(1), 69–86. https://doi.org/10.1080/00014788.2005.9729663
Serrano-Cinca, C., Gutiérrez-Nieto, B., & Bernate-Valbuena, M. (2019). The use of accounting anomalies indicators to predict business failure. European Management Journal, 37(3), 353–375. https://doi.org/10.1016/j.emj.2018.10.006
Séverin, E., & Veganzones, D. (2021). Can earnings management information improve bankruptcy prediction models? Annals of Operations Research, 306(1–2), 247–272. https://doi.org/10.1007/s10479-021-04183-0
Shakouri, M. M., Taherabadi, A., Ghanbari, M., & Jamshidinavid, B. (2021). Explaining the Beneish model and providing a comprehensive model of fraudulent financial reporting (FFR). International Journal of Nonlinear Analysis and Applications, 12, 39–48.
Sincerre, B. P., Sampaio, J. O., Famá, R., & Santos, J. O. (2016). Debt issues and earnings management. Revista Contabilidade & Finanças, 27(72), 291–305. https://doi.org/10.1590/1808-057x201601660
Singh, S., Raghuvanshi, A., & Anant, S. (2023). Evaluating financial distress: With special reference to the Navratna companies of India. Journal of Statistics and Management Systems, 26, 771–786. https://doi.org/10.47974/JSMS-1067
Srivastava, A., Assaf, R., Pandey, D. K., & Kumar, R. (2024). Stock price crash risk research: Current trends and future directions. Journal of Risk Finance. https://doi.org/10.1108/JRF-12-2023-0331
Sujeewa, G. M. M., & Kawshalya, M. D. P. (2020). Detecting red flags of corporate financial statement frauds using Beneish M score model in Sri Lanka. International Journal of Accounting & Business Finance, 6(2), 71–81. https://doi.org/10.4038/ijabf.v6i2.72
Süsi, V., & Lukason, O. (2019). Corporate governance and failure risk: Evidence from Estonian SME population. Management Research Review, 42(6), 703–720. https://doi.org/10.1108/MRR-03-2018-0105
Tarighi, H., Hosseiny, Z. N., Abbaszadeh, M. R., Zimon, G., & Haghighat, D. (2022). How do financial distress risk and related party transactions affect financial reporting quality? Empirical evidence from Iran. Risks, 10(3). https://doi.org/10.3390/risks10030046
Thu, Q. L. (2023). Impact of earning management and business strategy on financial distress risk of Vietnamese companies. Cogent Economics & Finance, 11(1). https://doi.org/10.1080/23322039.2023.2183657
Valaskova, K., Androniceanu, A.-M., Zvarikova, K., & Olah, J. (2021). Bonds between earnings management and corporate financial stability in the context of the competitive ability of enterprises. Journal of Competitiveness, 13(4), 167–184. https://doi.org/10.7441/joc.2021.04.10
Xu, C., Zhang, H., Hao, J., & Guo, L. (2021). Real earnings management in bankrupt firms. Journal of Corporate Accounting & Finance, 32(2), 22–38. https://doi.org/10.1002/jcaf.22483
Zagers-Mamedova, I. (2009). The effect of leverage increases on real earnings management. http://hdl.handle.net/1765/15572
Achim, M. V., & Borlea, N. S. (2013). Corporate governance and business performances. Modern approaches in the new economy. Lap Lambert Academic Publishing.
Achim, M. V., Borlea, N. S., & Mare, C. (2016). Corporate governance and business performance: Evidence for the Romanian economy. Journal of Business Economic and Management, 17(3), 458–474. https://doi.org/10.3846/16111699.2013.834841
Agrawal, K., & Chatterjee, C. (2015). Earnings management and financial distress: Evidence from India. Global Business Review, 16, 140–154. https://doi.org/10.1177/0972150915601928
Agustia, D., Muhammad, N. P., & Permatasari, Y. (2020). Earnings management, business strategy, and bankruptcy risk: Evidence from Indonesia. Heliyon, 6(2). https://doi.org/10.1016/j.heliyon.2020.e03317
Aldahray, A., & Alnori, F. (2021). Impact of regulatory environment on accruals manipulation of bankrupt firms. Spanish Journal of Finance and Accounting, 50(1), 114–142. https://doi.org/10.1080/02102412.2020.1735209
Altman, E. I. (1968). Financial ratios, discriminant analysis and the prediction of corporate bankruptcy. The Journal of Finance, 23(4), 589–609. https://doi.org/10.1111/j.1540-6261.1968.tb00843.x
Arshad, R., Iqbal, S. M., & Omar, N. (2015). Prediction of business failure and fraudulent financial reporting: Evidence from Malaysia. Indian Journal of Corporate Governance, 8(1), 34–53. https://doi.org/10.1177/0974686215574424
Bandyopadhyay, A. (2006), Predicting probability of default of Indian corporate bonds: Logistic and Z‐score model approaches. Journal of Risk Finance, 7(3), 255–272. https://doi.org/10.1108/15265940610664942
Beneish, M. D. (1999). The detection of earnings manipulation. Financial Analysts Journal, 55(5), 24–36. https://doi.org/10.2469/faj.v55.n5.2296
Cameron, C., & Trivedi, P. K. (2022). Microeconometrics using STATA (2 ed.). STATA Press.
Campa, D., & Camacho-Minano, M.-d.-M. (2015). The impact of SME’s pre-bankruptcy financial distress on earnings management tools. International Review of Financial Analysis, 42, 222–234. https://doi.org/10.1016/j.irfa.2015.07.004
Charitou, A., Lambertides, N., & Trigeorgis, L. (2007a). Earnings behaviour of financially distressed firms: The role of institutional ownership. Abacus-A Journal of Accounting Finance and Business Studies, 43(3), 271–296. https://doi.org/10.1111/j.1467-6281.2007.00230.x
Charitou, A., Lambertides, N., & Trigeorgis, L. (2007b). Managerial discretion in distressed firms. The British Accounting Review, 39(4), 323–346. https://doi.org/10.1016/j.bar.2007.08.003
Cho, S., Fu, L., & Yu, Y. (2012). New risk analysis tools with accounting changes: Adjusted Z-score. Journal of Credit Risk, 8(1), 89–108. https://doi.org/10.21314/JCR.2012.137
Costa, M., Lisboa, I., & Gameiro, A. (2022). Is the financial report quality important in the default prediction? SME Portuguese construction sector evidence. Risks, 10(5), Article 98. https://doi.org/10.3390/risks10050098
DeAngelo, H., DeAngelo, L., & Skinner, D. (1994). Accounting choice in troubled companies. Journal of Accounting and Economics, 17(1–2), 113–143. https://doi.org/10.1016/0165-4101(94)90007-8
Du Jardin, P., Veganzones, D., & Severin, E. (2019). Forecasting corporate bankruptcy using accrual-based models. Computational Economics, 54, 7–43.
Etemadi, H., Dehkordi, H. F., & Amirkhani, K. (2013). Effect of auditor opinion on discretionary accruals behavior of distressed firms: Empirical evidences from Iran. African Journal of Business Management, 7(20), 1956–1965.
Fang Li, S. (2010), Determinants of management’s preferences for an earnings threshold, Review of Accounting and Finance, 9(1), 33–49. https://doi.org/10.1108/14757701011019808
Goh, E., Mat Roni, S., & Bannigidadmath, D. (2022). Thomas Cook(ed): Using Altman’s z-score analysis to examine predictors of financial bankruptcy in tourism and hospitality businesses. Asia Pacific Journal of Marketing and Logistics, 34(3), 475–487. https://doi.org/10.1108/APJML-02-2021-0126
Greene, W. G. (2008). Econometric analysis (6 ed.). Pearson International edition.
Grove, H., Cook, T., Streeper, E., & Throckmorton, G. (2010). Bankruptcy and Fraud Analysis: Shorting and selling stocks. Journal of Forensic and Investigative Accounting, 2(2), 276–293.
Jaggi, B., & Lee, P. (2002). Earnings management response to debt covenant violations and debt restructuring. Journal of Accounting, Auditing & Finance, 17(4), 295–324. https://doi.org/10.1177/0148558X0201700402
Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305–360. https://doi.org/10.1016/0304-405X(76)90026-X
Johnson, R., & Wichmen, D. (2020). Applied multivariate statistical analysis (6 ed.). Pearson Education.
Kassem, R., & Higson, A. (2012). Financial reporting fraud: are standards’ setters and external auditors doing enough? International Journal of Business and Social Science, 3(19), 283–290.
Koerniadi, H. (2023). Do firms manage earnings after a downgrade in their credit rating? Review of Accounting and Finance, 22(5), 602–619. https://doi.org/10.1108/RAF-10-2022-0299
Li, C., Lou, C., Luo, D., & Xing, K. (2021). Chinese corporate distress prediction using LASSO: The role of earnings management. International Review of Financial Analysis, 76, Article 101776. https://doi.org/10.1016/j.irfa.2021.101776
Lin, H.-W., Lo, H.-C., & Wu, R.-S. (2016). Modeling default prediction with earnings management. Pacific Basin Finance Journal, 40, 306–322. https://doi.org/10.1016/j.pacfin.2016.01.005
Mahama, M. (2015). Detecting corporate fraud and financial distress using the Altman and Beneish models. International Journal of Economics, Commerce and Management, 3(1), 1–18.
Musanovic, E. B., & Halilbegovic, S. (2021). Financial statement manipulation in failing small and medium-sized enterprises in Bosnia and Herzegovina. Journal of Eastern European and Central Asian Research, 8(4), 556–569. https://doi.org/10.15549/jeecar.v8i4.692
Nyakarimi, S. (2022) Probable earning manipulation and fraud in banking sector. Empirical study from East Africa. Cogent Economics & Finance, 10(1), Article 2083477. https://doi.org/10.1080/23322039.2022.2083477
Saji, T. G. (2018). Financial distress and stock market failures: Lessons from Indian realty sector. Vision, 22(1), 50–60. https://doi.org/10.1177/0972262917750244
Saleh, N., & Ahmed, K. (2005). Earnings management of distressed firms during debt renegotiation. Accounting and Business Research, 35(1), 69–86. https://doi.org/10.1080/00014788.2005.9729663
Serrano-Cinca, C., Gutiérrez-Nieto, B., & Bernate-Valbuena, M. (2019). The use of accounting anomalies indicators to predict business failure. European Management Journal, 37(3), 353–375. https://doi.org/10.1016/j.emj.2018.10.006
Séverin, E., & Veganzones, D. (2021). Can earnings management information improve bankruptcy prediction models? Annals of Operations Research, 306(1–2), 247–272. https://doi.org/10.1007/s10479-021-04183-0
Shakouri, M. M., Taherabadi, A., Ghanbari, M., & Jamshidinavid, B. (2021). Explaining the Beneish model and providing a comprehensive model of fraudulent financial reporting (FFR). International Journal of Nonlinear Analysis and Applications, 12, 39–48.
Sincerre, B. P., Sampaio, J. O., Famá, R., & Santos, J. O. (2016). Debt issues and earnings management. Revista Contabilidade & Finanças, 27(72), 291–305. https://doi.org/10.1590/1808-057x201601660
Singh, S., Raghuvanshi, A., & Anant, S. (2023). Evaluating financial distress: With special reference to the Navratna companies of India. Journal of Statistics and Management Systems, 26, 771–786. https://doi.org/10.47974/JSMS-1067
Srivastava, A., Assaf, R., Pandey, D. K., & Kumar, R. (2024). Stock price crash risk research: Current trends and future directions. Journal of Risk Finance. https://doi.org/10.1108/JRF-12-2023-0331
Sujeewa, G. M. M., & Kawshalya, M. D. P. (2020). Detecting red flags of corporate financial statement frauds using Beneish M score model in Sri Lanka. International Journal of Accounting & Business Finance, 6(2), 71–81. https://doi.org/10.4038/ijabf.v6i2.72
Süsi, V., & Lukason, O. (2019). Corporate governance and failure risk: Evidence from Estonian SME population. Management Research Review, 42(6), 703–720. https://doi.org/10.1108/MRR-03-2018-0105
Tarighi, H., Hosseiny, Z. N., Abbaszadeh, M. R., Zimon, G., & Haghighat, D. (2022). How do financial distress risk and related party transactions affect financial reporting quality? Empirical evidence from Iran. Risks, 10(3). https://doi.org/10.3390/risks10030046
Thu, Q. L. (2023). Impact of earning management and business strategy on financial distress risk of Vietnamese companies. Cogent Economics & Finance, 11(1). https://doi.org/10.1080/23322039.2023.2183657
Valaskova, K., Androniceanu, A.-M., Zvarikova, K., & Olah, J. (2021). Bonds between earnings management and corporate financial stability in the context of the competitive ability of enterprises. Journal of Competitiveness, 13(4), 167–184. https://doi.org/10.7441/joc.2021.04.10
Xu, C., Zhang, H., Hao, J., & Guo, L. (2021). Real earnings management in bankrupt firms. Journal of Corporate Accounting & Finance, 32(2), 22–38. https://doi.org/10.1002/jcaf.22483
Zagers-Mamedova, I. (2009). The effect of leverage increases on real earnings management. http://hdl.handle.net/1765/15572