...Introduction to Earnings: Earnings are the fundamental indicator of a company’s value. Also referred to as ‘the bottom line’ and the ‘net income’, a company’s earnings is seen as the most important figure in a company’s financial statement as it is the summary measure of a company’s performance using the accrual basis of accounting. The theoretical value of a company’s stock is the present value of future earnings, or its ability to generate profit in the future (Lev, B. (1989). Earnings have a corresponding relationship with the projected value of a company with increased earnings representing an increase in company value which is inversely so for companies with lower earnings. Part A: Earnings Quality Although it is very common for investors to look at earnings in terms of quantity, the amount that the company has earned, developing an understanding of the quality of those earnings is vital to forecasting the quantity and credibility of future earnings of the company (smith). As reported earnings are a predominant driver of success, the reporting of earnings is a crucial business area that requires focus and direction. As so much of a businesses future and value is reflected in its earnings, it is very important that investors are provided with information that is free from mistakes and manipulation in order to get a true illustration of that company’s performance. The extent to which the financial performance is free from these errors and manipulations refers to the...
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...Contents lists available at ScienceDirect Journal of Accounting and Economics journal homepage: www.elsevier.com/locate/jae Understanding earnings quality: A review of the proxies, their determinants and their consequences$ Patricia Dechow a, Weili Ge b, Catherine Schrand c,n a b c University of California, Berkeley, CA 94720, United States University of Washington, Seattle, WA 98195, United States University of Pennsylvania, Philadelphia, PA 19104, United States a r t i c l e i n f o abstract Available online 4 November 2010 Researchers have used various measures as indications of ‘‘earnings quality’’ including persistence, accruals, smoothness, timeliness, loss avoidance, investor responsiveness, and external indicators such as restatements and SEC enforcement releases. For each measure, we discuss causes of variation in the measure as well as consequences. We reach no single conclusion on what earnings quality is because ‘‘quality’’ is contingent on the decision context. We also point out that the ‘‘quality’’ of earnings is a function of the firm’s fundamental performance. The contribution of a firm’s fundamental performance to its earnings quality is suggested as one area for future work. & 2010 Elsevier B.V. All rights reserved. JEL classification: G31 M40 M41 Keywords: Earnings quality Earnings management Review Survey 1. Introduction Statement of Financial Accounting Concepts No. 1 (SFAC No. 1) states that ‘‘Financial reporting...
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...between the Alternative Earnings Quality Measures and their Association with Stock Return: an Empirical Study on Non-financial Firms listed in ASE Introduction: Statement of financial accounting concept No. 1 (SFAC No. 1) state that “Financial reporting should provide information about an enterprise’s financial performance during a period.” Borrowing language from SFAC No. 1, we define earnings quality as follow: Higher quality earnings provide more information about the features of a firm’s financial performance that is relevant to a specific decision made by a specific decision maker. (Dechow&Schrand, 2010) In accounting and finance literature, several proxies for earnings quality have been used in empirical research. This may create problems in comparison the results of these studies, since these studies have used different measures for earnings. It is not clear whether these earnings quality measures are good proxies for each other. The purpose of this is to examine empirically the extent to which the alternative earnings quality measures are correlated, and whether they are good proxies for each other. In addition, the studies will investigate the association between earnings quality measures and firm’s realized stock return individually to find out which earnings quality measure is the most associated with stock return. And which measure explains the largest proportion of the variation in stock returns. The study will examine two set of earnings quality measures known in...
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...Wal-Mart‘s earnings and financial quality and report how this process relates to the ethics of professional accountancy. Most public companies are required to file its financial documents and annual reports with the SEC. To ensure that they are complying with both the financial and ethical guidelines ethical consistent with professional accountancy practices. Generally, companies like Wal-Mart posts ethical policies and procedures both in their stores and on their website. The SEC regulation remains constant; a company has the option of the process it uses to comply with the regulations. The financial health of a company can be determined by analyzing a company’s financial performance and ratios computed over two to three years. Organizations today are different from those in the past; the days when a person would work at the same company until retirement are long gone. Most people desire to work for a company that is people focused, diverse, successful, and conducts business in an ethical manner. Wal-Mart is one of the companies that offer each of those characteristics in addition to a strong ethics program that it closely follows. In fact, Wal-Mart has a Statement of Ethics, which includes the practice of honesty, integrity, and compliance with the law. Compliance with the Statements of Ethics is mandatory for each employee. The company also maintains a separate Code of Ethics for the senior financial officers. Wal-Mart also has in place a Related-Party Transaction Policy...
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...test whether the market-perceived audit quality captures actual audit quality. It also investigates the relationships among actual audit quality measured by a post hoc identification of auditor failures and earnings management as well as financial analysts’ forecast errors. Prior literature in audit quality, earnings management and financial analysts’ forecast errors are reviewed in this section. AUDIT QUALITY AND ACTUAL AUDIT QUALITY Audit quality has been a topic of significant interest in accounting research. In order to improve the understanding of audit quality, numerous studies have tried to detect the association between audit...
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...THE ACCOUNTING REVIEW Vol. 88, No. 2 2013 pp. 463–498 American Accounting Association DOI: 10.2308/accr-50318 Managerial Ability and Earnings Quality Peter R. Demerjian Emory University Baruch Lev New York University Melissa F. Lewis University of Utah Sarah E. McVay University of Washington ABSTRACT: We examine the relation between managerial ability and earnings quality. We find that earnings quality is positively associated with managerial ability. Specifically, more able managers are associated with fewer subsequent restatements, higher earnings and accruals persistence, lower errors in the bad debt provision, and higher quality accrual estimations. The results are consistent with the premise that managers can and do impact the quality of the judgments and estimates used to form earnings. Keywords: managerial ability; managerial efficiency; earnings quality; accruals quality. Data Availability: Data are publicly available from the sources identified in the text. I. INTRODUCTION W e examine the relation between managerial ability and earnings quality. We anticipate that superior managers are more knowledgeable of their business, leading to better judgments and estimates and, thus, higher quality earnings.1 Alternatively, the benefit We thank two anonymous reviewers, Asher Curtis, Patty Dechow, Ilia Dichev, Weili Ge, Marlene Plumlee, Phil Shane, Terry Shevlin, Wayne Thomas (editor), Ben Whipple, and workshop participants at the 2010 Kapnick Accounting Conference...
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...How to measure the quality of voluntary disclosure in annual reports The goal of voluntary disclosure is to give more information than required of reporting standards. This to create more disclosure (Scott, 2009, p.109). Although voluntary disclosure provides more information than required, the earnings quality can be questionable. Earnings quality can be defined as the extent to which reported earnings faithfully represent Hicksian income (Schipper and Vincent, 2000). The Hicksian income corresponds to the amount that can be pay out as dividend without damaging the firm (Hicks, 1939, p.176) and the definition of faithfulness means “correspondence or agreement between a measure or description and the phenomenon that it purports to present” (FASB Concepts Statement, No. 2, para. 63). The quality of the financial reporting are interesting for investment decision making. Low-quality earnings provide an incomplete allocation of resources. Also contracting of decisions based on low-quality will induce unintended wealth transfers (Schipper and Vincent, 2000). Schipper and Vincent (2000) consider four earnings quality constructs: - Time-series properties of earnings - Relations among income, accruals, and cash - Selected qualitative characteristics in the FASB’s conceptual framework - Implementation decisions Time-series properties of earnings Time-series properties of earnings include persistence, predictive...
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...THE ACCOUNTING REVIEW Vol. 77 Supplement 2002 pp. 107–114 DISCUSSION OF The Relation between Auditors’ Fees for Nonaudit Services and Earnings Management William R. Kinney, Jr. The University of Texas at Austin Robert Libby Cornell University I. INTRODUCTION rankel et al. (2002) (hereafter FJN) present a timely paper using a new data set to test several propositions, including one suggested by the Securities and Exchange Commission (SEC) about the relation between nonaudit fees paid by a registrant to its auditor and the registrant’s earnings quality. In this discussion we use comments from participants at The Accounting Review Conference on Quality of Earnings and our own analyses to evaluate FJN’s approach from both conceptual and operational perspectives. We organize our discussion around a ‘‘Predictive Validity Model’’ (displayed later in Figure 1) that shows conceptual relations between independent and dependent variables, as well as their operational measures and treatment of other causal factors. We use this model to describe and evaluate the authors’ approach, which blends complex behavioral and contractual relations with aggregate observable fee, accounting, and market price data. We hope that the discussion will encourage others to conduct additional research to address the important questions raised by both FJN and the SEC. F II. FJN’s APPROACH The underlying proposition examined by FJN is that the strength of the audit firm’s economic...
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...No. 1976 International Accounting Standards and Accounting Quality Mary E. Barth Wayne R. Landsman Mark H. Lang September 2007 RESEARCH PAPER SERIES http://ssrn.com/abstract=1029382 International Accounting Standards and Accounting Quality Mary E. Barth* Graduate School of Business Stanford University Wayne R. Landsman and Mark H. Lang Kenan-Flagler Business School University of North Carolina September 2007 Forthcoming, Journal of Accounting Research * Corresponding author: Graduate School of Business, Stanford University, 94305-5015, mbarth@stanford.edu. We appreciate helpful comments from Bill Beaver, Utpal Bhattacharya, Ole-Kristian Hope, Karl Lins, Doug Shackelford, Steve Young, Patricia Walters, T.J. Wong, Ray Ball (editor), an anonymous referee, and workshop participants at the Athens University of Economics and Business, Southern Methodist University, the 2005 Pennsylvania State University Accounting Research Conference, the 2005 Joint Journal of Accounting ResearchLondon Business School Conference on International Financial Reporting Standards, the 2006 New York University International Accounting Convergence and Capital Markets Integration Conference; research assistance of Yang Gui, Yaniv Konchitchki, and Christopher Williams; and funding from the Center for Finance and Accounting Research, Kenan-Flagler Business School. International Accounting Standards and Accounting Quality Abstract We examine whether application of International...
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...107 countries around the world. We aim to lead the profession by delivering visionary thought leadership projects, setting the benchmark for the highest ethical, professional and educational standards and enhancing and promoting the Chartered Accountant brand. We also represent the interests of members to government, industry, academia and the general public by actively engaging our membership and local and international bodies on public policy, government legislation and regulatory issues. The Institute can leverage advantages for its members as a founding member of the Global Accounting Alliance (GAA), an international accounting coalition formed by the world’s premier accounting bodies. The GAA has a membership of 700,000 and promotes quality professional services to share information and collaborate on international accounting issues. Established in 1928, the Institute is constituted by Royal Charter. For further information about the Institute, visit charteredaccountants.com.au Foreword The use of extensions to traditional financial reporting to capture...
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...Financial Reporting Standards (IFRS) in Europe. First, analyzing the determinants of voluntary IFRS adoption by publicly traded German firms during the period 19982004, we find that size, international exposure, dispersion of ownership, and recent IPOs are important drivers. Second, using the results from this determinant model to construct propensity score-matched samples of IFRS and German-GAAP (HGB) firms, we document significant differences in terms of earnings quality: IFRS firms have more persistent, less predictable and more conditionally conservative earnings. Third, analyzing information asymmetry differences between IFRS and HGB firms, we show that IFRS adopters experience a decline in bid-ask spread of 70 base points and an average of 17 more days with price changes per year. On the other hand, IFRS adopter’s stock prices seem to be more volatile. In the light of some important limitations of our study, we discuss IFRS-related research opportunities in post-2005 Europe. Keywords: IFRS, earnings quality, earnings attributes, information asymmetry, standard setting, IAS Regulation, Europe, propensity-score matching,...
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...Earnings Management The issue of earnings management is one of the most controversial topics in accounting. There isn’t one universal agreed upon definition for earnings management and different views tend to perceive it in different ways. What makes earnings management such a provocative topic is its direct link to earnings quality. Earnings quality is such an important factor to investors when coming to make their investment decisions because it reflects the integrity of the firm. The higher the quality of earnings, the more relevant and accurate the earnings figure become a reflection of the true financial position of the firm. We have seen many corporations manipulating their earnings using various earnings management techniques in order to report consistent and positive yet fictions earnings to their stakeholders, like for instance in the case of Enron. This draws attention and suspicion towards earnings management and that is why the investment community is concerned with detecting earnings management behavior within corporations and seeing how managers can negatively use earnings management to report falsified information in their financial reports. This essay is aimed at showing how corporations intentionally use earnings management to deceive their investing public and what corrective action can be done to resolve this issue. Some people argue that certain accounting behavior done by the firm which is perceived to be manipulative earnings management, is...
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...factors that influence common stock performance: earnings strength, relative valuation, and recent price movement. Reiteration 3/24/16 Previous Rating Buy (9/27/14 - 10/03/14) 52-Week Price Range $61.96 - $82.03 NEUTRAL neutral very negative Annual Dividend Yield -- Relative Valuation very positive Earnings Strength very negative Market Capitalization $6.77 Billions EPS increased from $2.03 to an estimated $2.09 over the past 5 quarters indicating an improving growth rate. Analyst forecasts have recently been raised. Company recently reported better than expected results. Annual Dividend Rate -- NEGATIVE neutral very positive Operating Earnings Yield of 2.8% ranks above 39% of the companies covered by Ford. Industry Medical Supplies & Equip Price Movement very negative NEUTRAL neutral very positive 1-year price down 0.9%: POSITIVE 1-quarter up 3.6%: NEGATIVE 1-month up 4.9%: NEUTRAL IDEXX Laboratories develops, manufactures and distributes products and provides services for the veterinary, bioresearch, water, livestock, poultry and dairy markets. The company’s Companion Animal Group operating segment provides diagnostic capabilities and information management solutions for the veterinary market and health monitoring and biological materials testing for the bioresearch market. The company’s Water operating segment provides testing solutions for the quality and safety of water. The company’s Livestock,...
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...known that, merger of equals have been on the rise in order allow for sustainable and fast development. There are many reasons why companies’ merge and some examples could be illustrated to prove the points of views. The purpose of the merger of equals is to keep equality amongst the companies. Specifying the expectations of the merger is often a large part of the merging process. Since the trend of merger of equals is more and more popular, we wonder why merger of equals becomes so important in our daily. Unfortunately, there are few research about merger and equals, especially the influence on earning quality. Through all the literatures we found, we notice that although merger of equals is popular today, there still are some disadvantages. Furthermore, from the literature about merger and acquisition, we can learn that there are many negative effects on the earning quality, which we had contained in our later research analysis. Comparing merger and acquisition with merger of equals, we can focus on the difference...
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...its general purpose financial statements. An entity may be first adopter if, in the preceding year, it prepared IFRS financial statements for internal management use, as long as those IFRS financial statements were not made available to external parties such as investors or creditors. In Malaysian data, IFRS standards are yet to be implemented. However, the results are of significant benefit for local standard setters as well as for other emerging countries that have similar capital market and institutional characteristics. More research could be conducted in other environments so that the impact of IFRS adoption in different environments can be revealed. Furthermore, additional studies can also consider other attributes of earnings quality such as earnings conservatism, predictability, comparability, persistence and timeliness. INTRODUCTION Mazars is a universal audit, accounting and discussing group employing more than 13,500 professionals in 71 countries through member firms. Mazars is the 11th largest accounting firm in the world. Mazars has a network of equivalent partners and joint ventures in a further 21 countries and is a founding member of the Praxity alliance, a network of independent firms. The Institute of Chartered Accountants in England and Wales (ICAEW) was recognized in 1880 and it is a member of Consultative Committee of Accountancy Bodies (CCAB) which is formed in 1974. These both Institutes evaluating with IFRS. The IFRS is International...
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