ISSN: 2225-8329
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Creative accounting remains an enduring concern in corporate financial reporting despite significant improvements in accounting standards, audit regulation, corporate governance mechanisms, and financial disclosure requirements. The issue matters most for large corporations because they face substantial capital-market expectations, analyst scrutiny, executive compensation pressures, debt obligations, and reputational concerns that may incentivise managers to influence reported financial performance. Although large firms are generally subject to stronger governance structures and are more likely to engage Big Four auditors, the effectiveness of these monitoring mechanisms in eliminating creative accounting remains uncertain. This conceptual paper examines the relationship between firm size, corporate governance, Big Four audit quality, and three major forms of earnings management: accrual earnings management, real earnings management, and classification shifting. Drawing primarily on agency theory, positive accounting theory, and the substitution perspective of earnings management, the paper argues that stronger monitoring mechanisms may reduce conventional accrual manipulation without necessarily eliminating managerial opportunism. Instead, managers of large corporations may replace easily detectable accounting manipulation with less observable manipulation of real activities or classification shifts. We propose a conceptual framework in which firm size and managerial incentives shape creative accounting. At the same time, audit quality and corporate governance constrain certain forms of manipulation and also affect managers' choice of earnings-management technique. The paper contributes to the literature by shifting attention from whether governance and Big Four auditors reduce earnings management to whether they alter the composition of earnings-management strategies. The framework provides several testable propositions and offers implications for auditors, boards, audit committees, regulators, investors, and future empirical research on large listed companies.
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