Detecting Earning Management: Deferred Taxes vs Accruals: A Pakistani Perspective

Objective: Earning Management has been one of the major areas of accounting research which has received a great attention in the past and also quite recently. Detecting earning management has always been one of the major areas of concern for the researchers. Earnings Management is pervasive. There are a number of models available to Detect and measure the earnings management activity. Methodology: The accrual models are the most used models to proxy the discretionary accruals and the earnings management. The effectiveness of the accrual models is somewhat skeptical at times when researchers found some inconsistencies in results while using the accrual models.  The researchers are still finding some better and effective model that can be used to better measure and capture the earnings management activity. The focus of this study is to find out as to whether a deferred tax as compared to accrual models is more useful in measuring or detecting the earnings management in Pakistani perspective. The study is based on the Pakistani companies listed on the Karachi Stock Exchange (KSE). This study is expected to be an addition to the existing research as to whether the models used for detecting earnings management through deferred taxes by Philips et al (2003) are also applicable to Pakistani Scenario which is a developing country. The study used Probit Regression Model with pooled cross sectional data to measure the usefulness of both; accruals and deferred taxes (the proxies)   used as better measure for Earnings management. Results: The results of the study are inconsistent with the Philips et al. (2003) study. Based on this study it is concluded that deferred tax is not incrementally useful along with the other accrual measure. The accruals models show significant results and are more powerful metric to detect earnings management as compared to the deferred taxes in Pakistan