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Evidence of Avoiding Working Capital Deficits in Australia
Author(s) -
Jiang Wei,
Lu Meiting,
Shan Yaowen,
Zhu Tingting
Publication year - 2016
Publication title -
australian accounting review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.551
H-Index - 36
eISSN - 1835-2561
pISSN - 1035-6908
DOI - 10.1111/auar.12095
Subject(s) - current liability , working capital , dividend , current asset , accounts receivable , capital (architecture) , business , shareholder , debt , accounting , psychological intervention , earnings , goodwill , finance , economics , monetary economics , corporate governance , psychology , psychiatry , history , archaeology
This study examines the incidence of managerial interventions in Australian firms to avoid reporting working capital deficits. We document a significant discontinuity in the distribution of current ratios at 1.0. We also find that the propensity of Australian firms to avoid working capital deficits is largely determined by the costs and benefits of management interventions. Firms with short‐term or long‐term debt are less likely to engage in accounts manipulation, while firms paying dividends are more likely to do so. Further examination of the components of current assets and current liabilities reveals that, to avoid working capital deficits, Australian firms tend to undertake actions to overstate accounts receivable rather than overstate inventory or understate current liabilities. The results provide practical guidance and implications for shareholders, auditors and regulators in identifying accounting irregularities.