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Abstract:
We examine 2,190 SEC Accounting and Auditing Enforcement Releases (AAERs) issued between 1982 and 2005. We obtain 676 firms that are alleged to have misstated their quarterly or annual financial statements. We examine the characteristics of misstating firms along five dimensions: accrual quality; financial performance; non-financial measures; off-balance sheet activities; and market-based measures. We compare misstating firms to themselves during non-misstatement years and misstating firms to the broader population of all publicly listed firms. The results reveal that during misstatement years, accruals and cash and credit sales are unusually high, while return on assets and the number of employees are declining. In addition, misstating firms finance more of their assets through operating leases and have relatively less PP&E. We find that market pressures appear to affect incentives to misstate. Misstating firms are raising new financing, have higher market-to-book ratios, and strong prior stock price performance. We develop a model to predict accounting misstatements. The output of this model is a scaled logistic probability that we term the F-Score, where values greater than one suggest a greater likelihood of a misstatement.

earnings quality, accounting misstatement, fraud prediction, accrual quality, F-Score

Abstract:
This study investigates whether market participants perceive pro forma earnings to be more informative and more persistent than standard GAAP operating income by analyzing a sample of 1,149 actual pro forma press releases issued between January 1998 and December 2000. We find that pro forma announcers report frequent GAAP losses and are mostly concentrated in the service and high-tech industries. We document a significant difference between pro forma numbers reported by managers and earnings figures published by I/B/E/S, and conclude that it is problematic to use an income figure reported by I/B/E/S as a proxy for pro forma earnings. Our analyses of short-window abnormal returns and revisions in analysts' one-quarter-ahead earnings forecasts indicate that pro forma earnings are more informative and more permanent than GAAP operating earnings. Our evidence suggests that market participants believe pro forma earnings are more representative of "core earnings" than GAAP operating income.

pro forma earnings, information content of earnings, persistence of earnings, analysts' forecasts

Abstract:
This study investigates whether market participants perceive pro forma earnings to be more informative and more persistent than GAAP operating income by analyzing a sample of 1,149 actual pro forma press releases. We find that pro forma announcers report frequent GAAP losses and are mostly concentrated in the service and high-tech industries. Our analyses of short-window abnormal returns and revisions in analyst' one-quarter-ahead earnings forecasts indicate that pro forma earnings are more informative and more permanent than GAAP operating earnings. Our evidence suggests that market participants believe pro forma earnings are more representative of "core earnings" than GAAP operating income.

pro forma earnings, information content of earnings, persistence of earnings, analysts' forecasts

Abstract:
An inherent property of accrual accounting is that accrual estimation errors must reverse. To the extent that extreme accruals are attributable to estimation errors, extreme accruals should be followed by extreme accrual reversals. We show that extreme accruals are followed by a disproportionately high frequency of extreme reversals. We also show that the predictable earnings changes and stock returns following extreme accruals (see Sloan, 1996) are explained by extreme accrual reversals. Finally, using a hand-collected sample of inventory write-downs, we provide direct evidence that the extreme reversals following extreme positive inventory accruals represent the reversal of estimation errors.

Accruals, Accrual Reversals, Earnings, Stock Returns, Inventory