Earnings management in business groups during the SARS-CoV-2 pandemic

Comporek, Michał Article Earnings management in business groups during the SARS-CoV-2 pandemic Central European Economic Journal (CEEJ) Provided in Cooperation with: Faculty of Economic Sciences, University of Warsaw Suggested Citation: Comporek, Michał (2024) : Earnings management in business groups during the SARS-CoV-2 pandemic, Central European Economic Journal (CEEJ), ISSN 2543-6821, Sciendo, Warsaw, Vol. 11, Iss. 58, pp. 286-304, https://doi.org/10.2478/ceej-2024-0019 This Version is available at: https://hdl.handle.net/10419/324616 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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DOI: 10.2478/ceej-2024-0019 To link to this article: https://doi.org/10.2478/ceej-2024-0019 Earnings Management in Business Groups during the SARS-CoV-2 Pandemic Michał Comporek Open Access. © 2024 M. Comporek, published by Sciendo. This work is licensed under the Creative Commons Attribution 4.0 International License. Michał Comporek University of Lodz, Faculty of Economics and Sociology, Rewolucji 1905 roku 39, 90-214 Łódź, Poland corresponding author: [email protected] Earnings Management in Business Groups during the SARSCoV-2 Pandemic Abstract This paper aims to assess the influence of the SARS-CoV-2 pandemic on the accrual-based earnings management patterns in non-financial business groups in the Warsaw Stock Exchange (WSE). This study contributes to the existing literature by considering earnings manipulation behaviours in assessing the reporting data quality, both in consolidated financial statements of business groups and individual financial statements of parent undertakings. The research methods are based on the Modified Jones Model with the simultaneous separation of individual subcategories of accruals via cross-sectional analysis and time-series data approach (separately for each business group). Empirical findings supported the presumption that earnings manipulation schemes in the SARS-CoV-2 transitional (2020) and crisis (2021) periods differed statistically compared to the previous 2019 and 2020 years, respectively. Moreover, this article proved that the company‘s potential financial distress could imply accrual-based earnings management behaviours and moderate the association between the SARS-CoV-2 pandemic and earnings manipulations activities. Finally, the obtained results confirmed that although business groups have an expanded set of balance sheet policy instruments, the quality of earnings reported in the individual financial statements of parent undertakings and the consolidated financial statements of business groups were similar during the SARS-CoV-2 pandemic. Keywords accrual-based earnings management | business group | parent undertakings | the SARS-CoV-2 pandemic JEL Codes G10, G32, M41 1. Introduction Concentrated forms of business cooperation are characterised by a high degree of economic and organisational integration, creating a single decisionmaking centre that exercises control over the group of companies or partnerships constituting a collective. A business group is a typical example of a hierarchical cooperation structure between enterprises operating in various areas of the world. The financial reporting system of a business group provides information on the comprehensive economic performance effects of all enterprises forming its structure. Accounting of business groups, the final expression of which is the preparation of consolidated financial statements, is characterised by a clear specificity reflected in an extended set of potential balance sheet policy instruments that might be used, among others, to alter earnings intentionally. Financial results influence numerous groups of public company stakeholders, being the most important economic measure disclosed in income statements (Degeorge et al., 1999). As Ansoff (1979) noted, reported earnings can be considered an indicator of the business’ economic efficiency, compensation for the risk incurred by investors and a factor attracting capital necessary to implement innovations and contribute to the company’s future growth. However, due to its accrual nature, earnings are particularly susceptible to manipulation consistent with prior managers’ intentions, while the appropriate selection of balance sheet policy tools affects both the size and structure of the financial result. The accounting policy of a business group is influenced by a wide set of determinants, among which macroeconomic factors are regarded as essential (Glaum & Wyrwa, 2011). Periods of economic prosperities and downturns affect the implemented CEEJ • 11(58) • 2024 • pp. 286-304 • ISSN 2543-6821 • DOI: 10.2478/ceej-2024-0019 288 solutions in the fields of the firm’s value and its assessment, the valuation of capital attributable to minority shares and the changes in the size of the capital group (Remlein et al., 2021). Similarly, economic turbulences are frequently an incentive to modify current patterns of earnings management behaviours in public enterprises (Filip & Raffournier, 2014; Grabiński, 2016; Jahmani et al., 2016; Lisboa & Kacharava, 2018). The prior literature suggests that earnings management premises result from market forces as well as the assumptions of agency theory. Changes in market conditions of business activity in contraction years may encourage managers to manipulate earnings upwards to avoid accounting loss or earnings reduction and meet analysts’ expectations (Maruszewska & Tuszkiewicz, 2024). On the other hand, during a financial crisis, firms are also suspected of managing earnings downward, primarily through further worsening the significant financial loss generated in the downturn period and transferring accounting items that would negatively impact the company’s economic performance in the future (Burgstahler & Dichev, 1997; Ayers et al., 2006). Moreover, a negative effect of the information content of accounting data during economic turbulence can be tied to low incentives for opportunistic actions by managers who may strive to manipulate earnings to obtain bonuses stipulated in the contract and dependent on pre-determined results, which are more difficult to achieve in the course of ordinary business (Holthausen et al., 1995; Shuto & Iwasaki, 2014; Rudiawarni & Budianto, 2022). Inconclusive findings in the literature highlight the need for continuing earnings management amid financial crisis studies, especially since previous research concerned different crises examined in various periods and countries taking into account diverse types of companies (see, inter alia, Franceschetti, 2020). This paper investigates the impact of the SARSCoV-2 pandemic on the evolution of accrual-based earnings management patterns in non-financial business groups listed in the Main Market of the Warsaw Stock Exchange (WSE). Thus, this research relates to two important scientific issues. Firstly, as noted by Remlein et al. (2021), in the contemporary economy, there is a growing interest in business groups as accounting entities that significantly impact the development of the capital market. Secondly, the pandemic crisis affecting the global economy since 2019 has varied from previous economic downturns in relation to the runup period and its outbreak (Reinhart, 2022). Due to the specificity, the turmoil caused by the SARS-CoV-2 pandemic could have shaped the manager’s motivation to alter earnings during the greatest financial distress of the 21st century differently than before. This study contributes to the existing literature in several ways. Due to the business groups being the central reference point of the research, this analysis enables the simultaneous comparison of reporting data contained in the consolidated financial statements of a group of companies or partnerships and individual financial statements of parent undertakings. This approach has a certain element of novelty considering prior studies. A direct comparison of the earnings reported in both types of financial statements is the core for understanding the roles of parent and subsidiary undertakings in the structures of business groups, the preferred methods of transferring incomes, and earnings redistribution in companies related by capital, personnel or contract. Hence, the applied approach allows for the judgement of whether earnings management behaviours implemented in the business groups are consistent with the patterns adopted in the parent firms that exercise control over other undertakings. Moreover, this study, alongside cross-sectional testing, considers the analysis of the time-series data approach specific to individual enterprises. The proposed research methodology involves the extraction of individual subcategories of discretionary accruals by creating equations separately for individual tested companies and not for a sample of enterprises. The main reason for choosing such a solution was the belief that earnings management patterns are specific to each company (and not the industry in which the company operates), which can be confirmed by, among others, assumptions of the upper echelons theory (Hambrick & Mason, 1984; Plöckinger et al., 2016; Taleatu et al., 2020). Therefore, although the main references in this research are observations from 2019–2021, the calculations necessary for grasping earnings manipulation behaviours were performed for companies whose shares were traded in WSE continuously in 2012–2021. Capturing earningsaltering patterns in companies whose shares have been traded on stock exchanges for long periods is another distinctive feature of this article. CEEJ • 11(58) • 2024 • pp. 286-304 • ISSN 2543-6821 • DOI: 10.2478/ceej-2024-0019 289 2. Literature review 2.1. The specificity of business groups as reporting entities The business group operating in the Polish capital market (following the provisions of Art. 3 of the Polish Accounting Act referred to as capital group) includes parent undertakings with its subsidiary and jointly controlled subsidiary undertakings (Adamczyk, 2017). According to the balance sheet law, a characteristic feature of this formation is exercising control over another obligation, which means the ability of the parent company to direct the financial and operating policy of another undertaking to derive economic benefits from its operations. From the perspective of the regulatory sphere, business groups do not have legal personality but are only created by at least two enterprises with such a personality. However, in the light of balance sheet law, a business group is perceived as a separate accounting entity, and its functioning is related to, among others, the obligation to prepare consolidated financial statements, which rests with the parent company. The purpose of consolidation is to combine the financial statement of undertakings comprising a group of companies and partnerships by aggregating the respective items in the financial statements of the parent and subsidiary undertakings, considering the necessary exclusions and adjustments (Adamczyk, 2017). The parent undertaking should prepare the annual consolidated financial statements of its group of companies or partnerships covering the data of the parent undertaking and subsidiary undertakings at all levels, presented in such a manner as if the groups constituted a single undertaking. Therefore, it is prepared in the same way as the company’s separate financial statements. Consolidation of financial statements may be carried out using the full method, the proportional method or the equity method, and the selection of the appropriate procedure depends primarily on the scope of control exercised by the parent firm over subsidiary undertakings. For the sake of order, in exceptional situations, the parent company may not prepare consolidated financial statements, not include some subordinated undertakings in consolidation or exclude some undertakings that constitute the business group from consolidation. Due to their peculiarities, business groups have broader opportunities for selecting balance sheet policies than individual economic units. In the case of a group of companies or partnerships, the accounting policy can be considered on two levels, taking into account both accounting solutions typical for a firm preparing financial statements on general principles, as well as accounting practices applicable only within business groups (Figure 1). The economic objectives The balance sheet policy of the business group developed at the parent undertaking level Accounting solutions relating to the business group as a whole The balance sheet policy of the business group Accounting guidelines for individual subordinated undertakings The balance sheet policy of the business group developed at the subordinated undertakings level Figure 1. A two-dimensional approach to the balance sheet policy of a business group Source: own elaboration based on Remlein (2021) CEEJ • 11(58) • 2024 • pp. 286-304 • ISSN 2543-6821 • DOI: 10.2478/ceej-2024-0019 290 of lower-level parent undertakings and subsidiary companies are usually consistent with the main goal of the higher-level parent undertaking. The spectrum of the balance sheet policy tools within business groups concerns both instruments resulting from the accounting policy implemented by the parent company, as well as instruments applicable at the level of consolidation of individual financial statements (e.g., regarding the exceptions and exemptions from consolidation, the net asset valuation, the valuation of the non-controlling interest) and that embedded within the group’s internal balance sheet policy (e.g., the transfer pricing policy, the cash-pooling transactions) (Remlein, 2021). 2.2. Earnings management patterns within business groups Earnings management occurs when managers use judgment in financial reporting, flexibility and discretion in the selection of accounting policies, as well as timing and structuring transactions to alter financial reports to either mislead some stakeholders about the underlying economic performance of the company or to influence contractual outcomes (Healy & Wahlen, 1999). The insight above highlights that managers can manipulate earnings using two distinct approaches. The first of them, referred to as accrual-based earnings management, applies to the registration, recording and presentation of economic events by a creative and non-standard interpretation of legally permitted accounting principles, and these procedures may result in both direct management in terms of shifting revenue and cost streams over time and misreporting (Degeorge et al., 1999). The second, known as real earnings management, concerns implementing operational activities beyond the previously used patterns to convince the company’s stakeholders that the set economic objectives have been achieved within the company’s core activities (Roychowdhury, 2006). From an instrumental point of view, business groups have a wider spectrum of instruments to influence their earnings result in a desired way. As Remlein et al. (2021) pointed out, one of the tools of real earnings management used in business groups is designing transactions of shares acquisitions in other companies in such a way as to obtain the desired capital relationship after the transaction. McKee (2005) indicated acquiring or spinning off new highly profitable companies to a group of related entities, as well as selling shares in low-profit companies as important methods of earnings manipulation in business groups. The mentioned earnings management techniques are described in the literature, respectively, as the big bet on the future and the throw-out of a problem child, allowing the parent company to select the appropriate consolidation circle. Piosik and Strojek-Filus (2013), based on surveys conducted among representatives of the financial and accounting services, confirmed that apart from commonly used balance sheet policy instruments such as depreciation write-offs, write-offs for receivables and inventories, and recognising and releasing provisions, business groups manage earnings through goodwill writeoffs, methods and estimates used to conduct goodwill impairment tests, and matching the conditions for conducting transactions between entities that constitute the business group. Referring to the last mentioned tool of influence reported earnings quality, Gavana et al. (2022) examined the relationships between related party transactions and different types of earnings management in Italian enterprises. Their research results lead to the conclusion that companies with highly related party transactions are less likely to raise earnings by overproduction and, consequently, the spread of fixed production costs over a larger number of manufactured goods and the reduction of fixed cost per unit sold. On the other hand, the significant positive relationships between related party transactions and abnormal levels of discretionary expenses suggest that firms striving to increase earnings might intentionally reduce selling costs, general and administrative expenses, or research and development expenditures to achieve the set objectives. Generally, Gavana et al. (2022) showed a statistically positive relationship between related party transactions and managing earnings downward but not in relation to manipulating earnings upward. As an aside, similar studies on the Chinese capital market were previously conducted by Cheung et al. (2009) and Hwang et al. (2013). The prior literature indicates inclusive findings about the scope and directions of earnings management practices in companies with capital, personal or contractual ties. Referring to international comparisons, Beuselinck et al. (1999) investigated the determinants of earnings management practices within multinational corporations from 91 countries. They proved that companies conducting their operations through several foreign and domestic affiliates strive to alter earnings through CEEJ • 11(58) • 2024 • pp. 286-304 • ISSN 2543-6821 • DOI: 10.2478/ceej-2024-0019 291 coordinated reporting strategies across subordinated undertakings. At the same time, parent companies established in countries with high-quality institutions tend to manage consolidated earnings more through subsidiaries in low-quality institutional environments. Alawang (2021), based on observations of business groups from 73 countries, revealed that earnings management patterns in parent and nonparent undertakings are statistically different. He noted that parent undertakings have lower abnormal production costs and abnormal discretionary expenses than subordinated firms, but, on the other hand, parent companies have higher abnormal cash flow from operations than other entities that constitute the business groups. However, the vast majority of existing studies on undertaken issues have been prepared to take into account country-specific conditions of business activity and applicable accounting, commercial and tax law in the considered region. Kim and Cheong (2006) proved that affiliations to business groups are one of the important factors affecting earnings management behaviours in Korean firms. They statistically evidenced that integrated enterprises tended to alter earnings more intensely than independent firms and suggested that conducting business operations within the group of companies provides the controlling shareholders of subordinated firms with stronger incentives to engage in earnings manipulations to cover up their opportunistic behaviour. Beuselinck and Deloof (2014) showed that Belgian business groups alter their earnings more than non-integrated companies, explaining that group firms have more tools and opportunities to manage earnings than stand-alone enterprises. Furthermore, they found that fully-owned group firms implement earnings management to a greater extent, confirming the hypothesis that controlling shareholders face fewer constraints in managing the earnings of a fully-owned subordinated firm. Bonacchi et al. (2018) revealed that the accrual-based and real earnings management levels in first-level subsidiary undertakings in Italy are generally higher than in parent companies. Moreover, they discovered that parent undertakings use their subsidiaries in the area of earnings manipulation to beat a threshold and avoid financial losses but not to meet market analyst expectations. Khan and Kamal (2022), exploring earnings management patterns in business groups in the context of parent–subsidiary links, gathered evidence that Pakistani companies belonging to business groups reduces accrual-based earnings management. However, the same conclusion concerning real earnings management activities in tested enterprises could not be confirmed. In turn, Muttakin et al. (2017) presented different conclusions regarding companies from Bangladesh, claiming that the level of discretionary accruals is positively associated with business group affiliation status. 2.3. Earnings management during the SARS-CoV-2 economic turbulences The economic situation significantly impacts the functioning of enterprises in the capital market. The outbreak of the pandemic contributed to changing the conditions of the country’s macroeconomic environment, affecting, among other things, the adopted earnings management behaviours (KłysikUryszek & Uryszek, 2022). Lizińska and Czapiewski (2023), based on estimated values of discretionary accruals, showed that non-financial joint-stock companies operating in the WSE were less prone to raise earnings but more eager to manage earnings downward during the first year of the pandemic period. Moreover, they indicated that public companies tend to adopt a big bath strategy through accountingtype earnings manipulation in the pandemic years. On the other hand, they proved statistical differences in patterns of real earnings management for the pre-pandemic (2019) and the pandemic (2020) years computed by the mix of abnormal levels of discretionary expenses and abnormal levels of cash flow from operations. Generally, according to the authors, examined companies evolved into more aggressive income-increasing strategies via real transactions during the financial crisis caused by the SARS-CoV-2 pandemic. An international comparison of the impact of the pandemic on earnings management for 46 countries by Lee et al. (2024) based on quarterly financial statements showed that firms in countries more affected by COVID-19 outbreaks were more likely to manage earnings through real earnings management than firms in countries with less severe COVID-19 outbreaks. Additionally, the estimation results prepared for Poland indicate the occurrence of negative average values of discretionary accruals separated by various models, indicating a tendency to manage earnings downward by Polish companies in 2020. Yaşar and Yalçın (2024), focusing their attention on enterprises from four European countries (i.e., the United Kingdom, Italy, Spain, and Turkey), proved that during periods of high uncertainty, managers tended to engage in accrual-based earnings management CEEJ • 11(58) • 2024 • pp. 286-304 • ISSN 2543-6821 • DOI: 10.2478/ceej-2024-0019 292 more than in pre-pandemic years. At the same time, the directions of managerial influence on the reported data might be varied (both for income-increasing and income-decreasing activities). These conclusions apply to all analysed countries. Different conclusions for 15 European countries were presented by Lassoued and El Mehdi (2021). They found that, indeed, during economic turbulences in 2020, examined companies tended to present lower-quality reported earnings. However, managers strive to obtain the set economic objectives by altering earnings upward, which can be explained by the desire to display an acceptable level of financial results in stakeholders’ eyes and alleviate the negative effects of the pandemic on the company’s economic performance. Ali et al. (2022), investigating public companies from the G-12 countries, discovered that examined enterprises seemed less involved in earnings management practices during the SARSCoV-2 pandemic than in the pre-pandemic period. They also discovered that entities in countries strongly hit by the consequences of the SARS-CoV-2 pandemic did not report a significant decrease in earnings manipulation by accruals. Several studies based on qualitative research examine the impact of the SARS-CoV-2 pandemic on earnings quality. Usheva and Vagner (2021), using a standard questionnaire survey, found that due to restrictions on the company’s operations during the pandemic disease, managers considered managing earnings by creating a certain reserve in the form of a savings account. Utilising the cookie jar reserves technique was supposed to help the company bargain with more critical conditions and evade bankruptcy. In turn, Comporek and Shchyrba (2024) showed that most finance managers and employees of financial and accounting services expressed that the pandemic has contributed to the intensification of earnings manipulation in the Polish capital market. The perception of the SARS-CoV-2 outbreak as a significant factor of changes in earnings management patterns in public companies was statistically related to such variables as the interviewees’ previous experience with earnings management activities, assessment of the ethicality of earnings-focused decisions and the size of the company computed by sales revenues. It is noteworthy that the number of publications on the links between the earnings management phenomenon and the SARS-CoV-2 pandemic is growing rapidly. The vast majority of them are concerned with the consequences of the impact of the pandemic on informativity and quality of reported data from the perspective of selected countries (Jordan et al., 2021; Yan et al., 2022; Fu et al., 2022; Hsu & Jan, 2023; Garfatta et al., 2023) or specific types of enterprises under consideration (Taylor et al., 2022; Brannan et al., 2024, etc.). 3. Methodology 3.1. Research sample The research sample used in this paper included 189 business groups whose shares were continuously traded in the WSE from 2012 to 2021. Capital groups conducting business in banking and insurance (codes 110 and 120 according to the WSE sector classification) and those that did not provide all the necessary financial data for calculations were removed from the research sample. The research sample selection, including stable companies listed on the stock exchange for at least ten consecutive years, was motivated by applying a time-series data approach in separating discretionary accruals and extracting abnormal accruals separately for individual business groups. The proposed research method allowed, among other aspects, to avoid presenting aboveaverage discretionary accruals in connection with IPOs, which constitute an incentive to put forward the company’s financial result in a better light in the eyes of its stakeholders and engaged managers in more aggressive income-increasing earnings management (Lizińska & Czapiewski, 2016). 3.2. Accrual-based earnings management measures The impact of the pandemic crisis on accounting-type earnings manipulations was measured by analysing the extent and directions of discretionary accruals over the period 2019–2021. Accordingly, if SARS-CoV-2 does affect earnings manipulations, significant differences in the magnitude and sign of discretionary accruals were expected between the pre-pandemic period (2019), transitional period (2020) and the crisis year (2021). The separation of the transition period in the study is explained by the fact that the first confirmed cases of SARS-CoV-2 and the state of epidemic threat in Poland occurred in March 2020, and therefore, the entire year 2020 cannot be considered a pandemic. CEEJ • 11(58) • 2024 • pp. 286-304 • ISSN 2543-6821 • DOI: 10.2478/ceej-2024-0019 293 The interpretation and assessment of the scope of the earnings management phenomenon in reporting entities depends significantly on the adopted method of extracting individual subcategories of accruals. In this research, the separation of discretionary accruals (DACC) was carried out by the Modified Jones model (Dechow et al., 1995). Thus, the value of abnormal accruals equals the random error in the examined regression model. When discretionary accruals deviate significantly from zero, it suggests a higher degree of accrual-based earnings manipulation in the company. The Modified Jones model adopts the following analytical formula: 𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑡𝑡𝑡𝑡 𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑡𝑡𝑡𝑡−1 =𝛼𝛼𝛼𝛼1�1 𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑡𝑡𝑡𝑡−1�+𝛼𝛼𝛼𝛼2�∆𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑡𝑡𝑡𝑡−∆𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑇𝑇𝑇𝑇𝑡𝑡𝑡𝑡 𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑡𝑡𝑡𝑡−1 �+𝛼𝛼𝛼𝛼3�𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑅𝑅𝑅𝑅𝑡𝑡𝑡𝑡 𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑡𝑡𝑡𝑡−1�+𝜀𝜀𝜀𝜀𝑡𝑡𝑡𝑡 (1) Where: TACCt – total accruals in period t (determined by the balance sheet approach or the cash flow approach); TAt – total assets in year t; REVt – revenues from sales in year t; RECt – net receivables in year t; PPEt – gross property, plant and equipment in year t; α1, α2, α3 – a firm-specific parameter (in the regression model); ε t – a random error. The calculation of total accruals refers to changes in non-monetary components of working capital (Garcia Lara et al., 2005; Mendes et al., 2012; Wróblewski et al., 2017). The balance sheet approach enables observing the aggregate effects of earnings management processes, such as accelerating the recognition of receivables or write-offs for receivables and inventories, calculating total accruals based on the following formula: TACCt=( D CAtD CASHt)-( D CLtD )-DEPt(2) Where: CAt – current assets in period t ; CASHt – shortterm investments in year t; CLt – current liabilities in year t; STDt – short-term debts in year t; DEPt – depreciation in the fiscal year t; other designations – as above. The proposed research approach allowed also obtaining an answer to the question of whether the applied methods of calculations of individual subcategories of accruals (cross-sectional vs firmspecific time-series approach) determine statistically the scale of the earnings management phenomenon in business groups during the SARS-CoV-2 pandemic. The time-series and cross-sectional approaches deliver conceptually diverse estimates of discretionary accruals. The first method uses data from an estimation period during which no systematic earnings management is expected to occur. Its disadvantage is the assumption that the temporal model requires a sample that provides at least these observations for each company. Consequently, companies under investigation are usually mature business entities with greater reputational capital to lose if earnings manipulations are uncovered. Hence, this firm-specific time-series data approach could introduce a selection bias (Callao et al., 2017). In turn, the cross-sectional approach assumes homogeneity across firms in the same industry (Larker & Richardson, 2004), so the probability of detecting irregularities in reported data is lower if such accruals are correlated for several companies from the same industry. Jeter and Shivakumar (1999) even noticed that only enterprises whose accruals are negative relative to the industry benchmark could be identified as earnings manipulators. In turn, Bagnoli and Watts (2000) showed that companies are much more willing to manage earnings if their direct competitors in the sector also strive to alter financial results. Hence, when estimating discretionary accruals using crosssectional regression, the value of nondiscretionary accruals may be overstated, and, in turn, the level of abnormal accruals may be underestimated. 3.3. Empirical models specification To examine the influence of the SARS-CoV-2 pandemic on earnings management patterns in business groups and parent undertakings, we use the ordinary least square (OLS) with robust standard errors on the pooled panel sample. The formula of the adopted model is as follows: 𝐷𝐷𝐷𝐷𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑡𝑡𝑡𝑡=𝛼𝛼𝛼𝛼0+𝛼𝛼𝛼𝛼1𝑌𝑌𝑌𝑌𝑅𝑅𝑅𝑅𝑇𝑇𝑇𝑇𝑅𝑅𝑅𝑅+ �𝑇𝑇𝑇𝑇𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝑇𝑇𝑇𝑇𝑅𝑅𝑅𝑅𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑅𝑅𝑅𝑅𝑇𝑇𝑇𝑇𝑅𝑅𝑅𝑅𝑉𝑉𝑉𝑉𝑇𝑇𝑇𝑇𝑉𝑉𝑉𝑉𝐶𝐶𝐶𝐶𝑅𝑅𝑅𝑅𝑉𝑉𝑉𝑉 𝑛𝑛𝑛𝑛=9 𝑖𝑖𝑖𝑖=1 + 𝜀𝜀𝜀𝜀𝑡𝑡𝑡𝑡 (3) The main variable YEAR tests the effect of the SARS-CoV-2 pandemic on the variance of discretionary accruals (Aljughaiman et al., 2023; Yaşar & Yalçın, 2024). As control variables describing firm-specific attributes that potentially affect the magnitude of accrual-based earnings management in the tested sample, we used assets structure (TANG), growth opportunities (GO), company profitability (ROA), the level of retained earnings (RET), longterm liabilities (LTL), leverage (LEV), operational risk (EVOL), effective tax rate (ETR) and non-debt tax shield CEEJ • 11(58) • 2024 • pp. 286-304 • ISSN 2543-6821 • DOI: 10.2478/ceej-2024-0019 300 6. Conclusions The earnings management phenomenon highlights the importance of managers’ discretionary influence on reporting data quality. The implemented earnings manipulation practices depend not only on the adopted accounting principles but also on applied accounting estimates, professional judgment and stakeholders’ expectations regarding the future financial standing of the company (Grabiński, 2016). The impact of macroeconomic factors on business groups’ financial situation is not obvious and completely predictable. On the one hand, the economic crisis may encourage managers to report high losses per the assumptions of the big bath technique to demonstrate improvement in the company’s standing in subsequent periods. On the other hand, firms hoping to defend their expected financial results may have a stronger incentive to increase their financial results. This situation has been demonstrated, among others, in the tested sample about the crisis year (2021). The striving of capital groups operating in the WSE to alter earnings upward may be important information for auditors, who pay much more attention to the practice of intentional overstatement of reported earnings due to the risk of company bankruptcy or the risk of loss of reputation (Krishnan et al., 2011). The empirical research cannot be generalised to all companies from the Polish capital market. However, they draw attention to the need for further studies on the issue of earnings quality in business groups during economic turmoil, including the crisis caused by the SARS-CoV-2 pandemic. The direction for further empirical observations may be the assessment Table 7. The effect of the SARS-CoV-2 pandemic and financial distress on accrual-based earnings management Variables Time-series data approach Cross-sectional approach 2019-2020 2020-2021 2019-2020 2020-2021 B (St. Error) B (St. Error) B (St. Error) B (St. Error) Intercept -0.008 0.013 0.024* 0.013 -0.035 0.020 -0.016 0.018 YEAR 0.039*** 0.011 0.028*** 0.010 0.018 0.016 0.035** 0.014 DIST 0.002** 0.001 -0.002*** 0.001 0.003*** 0.001 0.001 0.001 YEAR*DIST -0.004*** 0.001 -0.001* 0.000 -0.002 0.001 0.001** 0.000 TANG -0.004 0.025 -0.039 0.025 0.011 0.037 -0.023 0.035 GO -0.064 0.067 -0.075 0.066 0.088 0.098 0.069 0.093 ROA 0.250*** 0.026 0.317*** 0.044 0.609*** 0.038 0.390*** 0.062 RET -0.015*** 0.005 -0.013*** 0.003 -0.023** 0.008 -0.006 0.005 LTL -0.041*** 0.007 -0.033*** 0.005 -0.006 0.011 0.005 0.007 LEV -0.001 0.001 0.000 0.001 -0.001 0.001 -0.002 0.001 EVOL -0.001 0.000 -0.003** 0.001 -0.001** 0.000 -0.008*** 0.001 ETR 0.004 0.006 0.000 0.001 0.002 0.008 -0.001 0.001 NDTS -0.147 0.148 0.039 0.162 -0.351 0.216 -0.150 0.227 R0.594 0.503 0.705 0.522 R20.353 0.253 0.497 0.272 Adj. 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