Abstract
The credibility and transparency of financial reporting directly influence investors' decisions, market trust, and capital allocation efficiency. Earnings management, which occurs when managers manipulate profit or loss levels known internally but not disclosed under normal circumstances, poses a significant challenge to assessing the quality of financial performance. This phenomenon encompasses accounting discretion, often pursued through creative interpretations of accounting standards. Although interest in earnings management spans over 70 years, detection methods have primarily been developed for large, developed markets such as the U.S., with limited adaptation for smaller or emerging economies. This study addresses methodological challenges in estimating earnings management in smaller markets, using the Polish regulated market as an example. Key issues include sample selection, model choice for accrual-based earnings management, definition of endogenous variables, and methodological approaches to estimation, such as cross-sectional versus firm-specific time-series data. Empirical findings indicate that, although the choice of regression model has a limited effect, the methodology for calculating total accruals and the criteria for sample grouping substantially influence the outcomes, with sectoral differences further highlighting the sensitivity of earnings management measures to methodological assumptions.
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