Abstract
This study examined the relationship between the variance of selected financial statement accounts (Accounts Receivable (AR); selling, General and Administrative expense (SG&A); and Net Change in Accruals (NCA)) and the frequency with which a firm meets, or beats analysts’ earnings forecast. The study focused on the consumer goods sector. The objective was to examine if the selected financial statement of accounts are purposefully used by management to manipulate earnings in order to meet and/or beat analysts’ earnings forecasts. All prior research on earnings management and management’s earnings guidance used estimates of discretionary accruals as the predominant earnings management tool. The estimates of the discretionary accruals were based on Jones model, and/or modified Jones model. The validity of these studies is very much dependent on the relationship between the estimated discretionary variables and their actual levels. Researchers looked at the variance of those accounts that are suspect for earnings management. Researchers believed that these variables will exhibit markedly different variance if manipulated to meet forecast estimates than if they vary with the normal business operations. Researchers found that there is a significant difference between the variance of SG&A and NCA of the firms that meet and/or beat the analysts’ forecast and those that do not. Researchers also found that accounts receivable was significant in explaining the frequency of meeting and/or beating the analysts’ forecast. The other explanatory variables (NCA and SG&A), were not statistically significant, suggesting that real economic activity may not be a potent tool for earnings management
FELICIA Y. AMADI, GENE R. SULLIVAN, MITCHELL FRANKLIN. (2014) On the Variance of Financial Statement Accounts and Earnings Management, International Review of Management and Business Research, Volume 3, Issue 2.
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