Utilizing SMEs panel data and an Ordinary Least Squares approach, this study examines the effects of tax and financially distressed proxies on Greek SMEs’ earnings management during the 2008–2017 period. We find that SMEs that have great tax liabilities and are financially obligated seem to manipulate their accrual accounts.. Our findings extend previous evidence on the determinants of earnings management and have important policy implications. First, we propose authorities to target their audit in crucial accrual accounts especially in financially turbulent times. Moreover, we suggest a better management of taxes that will alter the perception of the citizens regarding tax evasion. Further, we observe, that seeking working capital mainly from the banking sector and less from new investors (share capital increase), strangles business liquidity.

Keywords: Earnings management, accruals, distressed firms, SME, taxation