Detecting Earnings Management: A New Approach

2012/02/06 by PATRICIA M. DECHOW, Patricia Dechow, Amy P. Hutton +5 · 617 citations
Business, Management and Accounting · Economics, Econometrics and Finance · #Accounting #Accrual #Artificial intelligence #Auditing, Earnings Management, Governance #Bayesian probability #Computer science #Earnings #Earnings management #Econometrics #Economics #Exploit #Financial Distress and Bankruptcy Prediction #Law, Economics, and Judicial Systems #Power (physics) #Prior probability

paper · doi:10.1111/j.1475-679x.2012.00449.x

published in Journal of Accounting Research 50(2), 275-334 (Wiley)

openalex publication_date 2012/02/06 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/25

Abstract

ABSTRACT This paper provides a new approach to test for accrual‐based earnings management. Our approach exploits the inherent property of accrual accounting that any accrual‐based earnings management in one period must reverse in another period. If the researcher has priors concerning the timing of the reversal, incorporating these priors can significantly improve the power and specification of tests for earnings management. Our results indicate that tests incorporating reversals increase test power by around 40% and provide a robust solution for mitigating model misspecification arising from correlated omitted variables.

Citations

• Detecting Earnings Management.
• Does Earnings Management Affect Firms’ Investment Decisions?
• Using Heteroscedasticity Consistent Standard Errors in the Linear Regression Model
• A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity
• Discussion of the Quality of Accruals and Earnings: The Role of Accrual Estimation Errors
• The Quality of Accruals and Earnings: The Role of Accrual Estimation Errors

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• ESG rating disagreement and bank loan availability: Evidence from China. [europepmc]

Related

• Detecting Earnings Management.
• The Use of Unsigned Earnings Quality Measures in Tests of Earnings Management
• How Are Earnings Managed? An Examination of Specific Accruals*
• Evidence on the Trade-Off between Real Activities Manipulation and Accrual-Based Earnings Management
• Measuring Real Activity Management