A Diagnostic for Earnings Management Using Changes in Asset Turnover and Profit Margin

Purpose of this paper is to detect earnings management by using asset turnover ratio and earnings margin ratio in listed companies in Tehran stock Exchange. Three variables are used to detect management earnings: meet or beat expectations, extreme earnings surprises and earnings restatements. So three hypothesizes are formulated and 66 sample firms data for the years 2008 till 2011 are used. To test hypothesizes the logit regression technique is used. Results of this research show that contemporaneous increase in earnings margin ratio and decrease asset turnover ratio is signal upward earnings management. Also contemporaneous decrease of earnings margin and increase of asset turnover ratio is signal downward earnings management. In addition, this diagnostic approach includes more information and more useful details in comparison with accruals data approach.