Title: Detecting earnings management based on the quality of total accruals
Authors: Xiaoying Chen, Ping Lin, Kai S. Koong
Addresses: College of Business Administration, California State University, Long Beach, 1250 Bellflower Blvd., Long Beach, CA 90840, USA. ' College of Business Administration, California State University, Long Beach, 1250 Bellflower Blvd., Long Beach, CA 90840, USA. ' College of Business Administration, University of Texas-Pan American, 1201 West University Drive, Edinburg, TX 78539, USA
Abstract: This study introduces a new approach to assess accounting aggressiveness by evaluating a firm|s total accrual quality. This measure is more comprehensive than the current accruals-based approach provided by Dechow and Dichev (2002) as it examines the long lags between accruals and cash flow realisations. We show that firms with low quality of total accruals have greater volatilities in their cash flows, earnings and equity returns, which are usually present in firms with red flag activities such as frequent one-time charges, acquisitions, change in discretionary expenditures and change in special items. Furthermore, the study explores and provides benchmark for the degree of total accrual quality in various industries.
Keywords: accounting accruals; total accruals; earnings management; accrual quality; cash flow realisation; equity returns.
International Journal of Services and Standards, 2009 Vol.5 No.3, pp.214 - 235
Published online: 22 Sep 2009 *Full-text access for editors Access for subscribers Purchase this article Comment on this article