An Analysis on the Relationship Between Karma Models and Altman Z Model in Earnings Management: A Study on US Companies

Abstract

The relationship between bankruptcy models and earnings management models constitutes a significant topic in the fields of financial analysis and forensic accounting. While bankruptcy models focus on evaluating a company's financial health and bankruptcy risk, earnings management models analyze how companies might manipulate their financial results or assess the quality of these results. The relationship between these two types of models is critically important for understanding a company's financial health and transparency. When used together, these models provide investors, auditors, and analysts with a more comprehensive and in-depth understanding of a company's financial health. The presence of earnings management practices, especially in situations with high bankruptcy risk, can create additional questions regarding the reliability of a company's financial reports. Therefore, the combined use of these models can help achieve more robust and reliable results in the financial analysis process. In this study, the relationships between the Altman Z-Score, Beneish M-Score, and Dechow F-Score were determined using sample data. Subsequently, the compatibility of the models was discussed. The results indicate that when the Altman Z-Score is evaluated together with the Dechow F-Score, more accurate results are presented.