Earnings management practices of financially distressed firms in South Wollo, Ethiopia

This study examines the most widely used earnings management techniques employed among financially distressed manufacturing companies in South Wollo, Ethiopia. The study employed a quantitative research design and utilized secondary data from audited financial statements of sampled manufacturing firms covering 2020 to 2024. A multi-stage sampling incorporating stratified and simple random sampling techniques was employed to choose 49 manufacturing companies. Data were analyzed through descriptive statistics and a panel random-effects multivariate Seemingly Unrelated Regression (SUR) model. The findings show that financial distress has a significant positive effect on Real earnings management (REM), but no significant impact on Accrual earnings management (AEM). This suggests that financially distressed firms tend to manipulate real earnings activities rather than accrual earnings, likely to meet short-term performance targets while maintaining long-term sustainability. The study recommends stronger regulatory monitoring, enhanced disclosure, and governance reforms to mitigate opportunistic real earnings management, thereby promoting transparent, accountable, and sustainable corporate practices among financially distressed firms.