Detecting Earnings Management Practices in European Insurance Sector: a Purpose and Application of Accrual Modelling and Distribution of Earnings

Purpose. The purpose of the present paper was to gauge the extent of the impact on earnings management derived from the adoption of International Financial Reporting Standards (IFRS) 17 as well as detecting whether the impact will be similar in different European “Insurance” and “Reinsurance” industries. Design/Method/Approach. To provide empirical evidence that earnings management is more frequent in some country and less frequent in others by means of a statistical analysis, a sample of European listed “Insurance” and “Reinsurance” companies in the period 2018-2020 was observed. Findings. That being said, the lesson learned from this study is that the implementation of the new principle, written to discipline the accountancy of insurances contracts, and its consequences, must be carefully analyzed and monitored by the regulators, as well as correctly adopted by managers, as the determined revenues could have an impact on the pre-existing earning management practices. Theoretical implications. The paper of the present research also concerns the predictions on the behavior of managers that can be foreseen considering the agency theory; therefore, knowing ex-ante in which industries earnings management has a high impact, provides the option to foresee the hypothetical moves of the managers in the implementation of IFRS 17. Originality/value. Specifically, companies belonging to two sectors were selected: “Insurance” and “Reinsurance”. The Jones Model was applied. The statistical analysis brought to light that earnings management practices are “commonly adopted” in the “Insurance” and “Reinsurance” industry, which is consequently highly impacted by the introduction of IFRS 17. Research limitations/Future research. The total number of observations is high, all companies analyzed belong to only two industries. The analysis could be extended to a greater number of industries and companies in order to provide a more complete overview of the presence and the persistence of earnings management policies in different European financial companies typologies. Paper type – empirical. JEL Сlassіfіcatіon: G18, G22, G28, G30, G32.