The Modified Role Of Accounting Conservatism In The Relationship Between Earnings Quality And Predicting Financial Distress

Abstract

The aim of the research is to know the impact of earnings quality in predicting financial distress measured by the Altman model and the modified role of accounting conservatism. To achieve the objectives of the research, the analytical descriptive approach was used, and data were collected from the annual reports of the industrial companies listed on the Amman Stock Exchange during the period (2015-2019), simple and multiple linear regression was used to test the hypotheses of the study using the (E-VIEWS) program. The results concluded that there is an effect of the two measures of earnings quality (earnings management and earnings persistence) in predicting financial distress. It was found that increasing the company's practice of earnings management increases its exposure to financial distress and bankruptcy, and increasing earnings persistence reduces the possibility of exposure to financial distress and bankruptcy. With the increase in the practice of earnings management leads to an increase in the possibility of financial distress and bankruptcy. The results also showed that there is a modified role of accounting conservatism in the relationship between earnings management and financial distress. In this study, we recommend the need for companies to apply standard models that assess the company's ability to continue, continuously evaluate the control methods of management, and the possibility of its manipulation of financial statements, and evaluate the management's attitudes toward earnings management and creative accounting practices, working to link the interests of the company with the interests of management. The need to compare the profits during the period with the profits of previous periods, and to determine the extent of the management’s ability to increase annual profits and develop them over time to ensure earnings persistence, the need for the level of accounting conservatism to be moderate, so that an increase in accounting conservatism does not lead to decision-makers and users of financial statements obtaining misleading information about the company.