Abstract

http://ssrn.com/abstract=2376408
 


 



The Misrepresentation of Earnings


Ilia D. Dichev


Emory University - Goizueta Business School

John R. Graham


Duke University; National Bureau of Economic Research (NBER)

Campbell R. Harvey


Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER)

Shivaram Rajgopal


Columbia Business School

August 10, 2015

Financial Analysts Journal, Forthcoming

Abstract:     
We ask nearly 400 CFOs about the definition and drivers of earnings quality, with a special emphasis on the prevalence and detection of earnings misrepresentation. CFOs believe that the hallmarks of earnings quality are sustainability, absence of one-time items, and backing by actual cash flows. Earnings quality is determined in about equal measure by controllable factors like internal controls and corporate governance, and non-controllable factors like industry membership and macroeconomic conditions. On earnings misrepresentation, CFOs believe that in any given period a remarkable 20% of firms intentionally distort earnings, even though they are adhering to generally accepted accounting principles. The economic magnitude of the misrepresentation is large, averaging about 10% of reported earnings. While most misrepresentation involves earnings overstatement, interestingly, one third of the firms that are misrepresenting performance are low-balling their earnings or reversing a prior intentional overstatement. Finally, CFOs provide a list of red flags that can be used to detect earnings misrepresentation.

Related paper:
"Earnings Quality: Evidence from the Field" http://ssrn.com/abstract=2103384

Teaching/Presentation Slides:
"A Guide to Earnings Quality" http://ssrn.com/abstract=2347428


Number of Pages in PDF File: 23

Keywords: Earnings management, Earnings misrepresentation, Smooth earnings, Accruals, GAAP, Low-balling, Cookie jar reserves, Sustainable earnings, predictable earnings, real earnings management

JEL Classification: M40, M41, M42, M48, G32, G38


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Date posted: January 9, 2014 ; Last revised: August 12, 2015

Suggested Citation

Dichev, Ilia D. and Graham, John R. and Harvey, Campbell R. and Rajgopal, Shivaram, The Misrepresentation of Earnings (August 10, 2015). Financial Analysts Journal, Forthcoming. Available at SSRN: http://ssrn.com/abstract=2376408 or http://dx.doi.org/10.2139/ssrn.2376408

Contact Information

Ilia D. Dichev
Emory University - Goizueta Business School ( email )
1300 Clifton Road
Atlanta, GA 30322-2722
United States
John Robert Graham
Duke University ( email )
Box 90120
Durham, NC 27708-0120
United States
919-660-7857 (Phone)
919-660-8030 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Campbell R. Harvey (Contact Author)
Duke University - Fuqua School of Business ( email )
Box 90120
Durham, NC 27708-0120
United States
919-660-7768 (Phone)
919-660-8030 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Shivaram Rajgopal
Columbia Business School ( email )
3022 Broadway
New York, NY 10027
United States

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