Investor Confidence in Finance: Challenges of Earnings Management and Accounting Manipulation

Abstract

Investor confidence forms the cornerstone of any financial market, and in India, this trust has been repeatedly challenged by episodes of earnings management, corporate fraud, and accounting manipulation. Despite advances in regulatory mechanisms and corporate governance, recent scandals from 2023 to 2025 reveal persistent vulnerabilities that compromise market integrity. This study investigates prominent Indian cases, including the IndusInd Bank derivative accounting lapse, the cooperative credit fraud at DMCSL in Beed, the large-scale real estate fraud in the Nexa Evergreen scheme, and multi-level investment scams across states. Together, these scandals demonstrate how financial misreporting, deceptive practices, and weak oversight continue to cause significant investor losses and erode trust in institutions. The paper examines how managers manipulate earnings to project financial stability, how auditors fail to identify irregularities, and how regulatory enforcement remains slow and reactive. For example, IndusInd Bank overstated profits by nearly ₹1,960 crore, while cooperative and real estate scams wiped out savings of tens of thousands of small investors. These incidents highlight systemic weaknesses, ranging from poor financial literacy among retail investors to inadequate technological surveillance by regulators. By synthesizing literature and case evidence, the study identifies recurring patterns of manipulation and investor exploitation. It emphasizes the urgent need for reforms, such as strengthening auditor independence, deploying artificial intelligence and blockchain for real-time monitoring, and enhancing whistleblower protection. The findings highlight that investor education is equally important, as many victims are lured by unrealistic promises of high returns. The study concludes that protecting investor confidence in India requires collective responsibility: regulators must tighten enforcement, auditors must uphold integrity, corporations must adopt transparent reporting, and investors must be better informed. Only through these coordinated measures can the credibility of India’s financial markets be safeguarded in the long run.