Do Models of Discretionary Accruals Detect Actual Cases of Fraudulent and Restated Earnings? An Empirical Evaluation
Keith L. Jones
George Mason University
Gopal V. Krishnan
American University; American University - Kogod School of Business
New Mexico State University - Department of Accounting & Business Computer Systems
Contemporary Accounting Research, Forthcoming
We examine the association between the existence and the magnitude of a fraudulent event that overstated earnings, non-fraudulent restatements of financial statements, and nine competing models of discretionary accruals, accrual estimation errors (Dechow and Dichev 2002 and McNichols 2002), and the Beneish (1997 and 1999) M-score. We use the size of the downward earnings restatement following the discovery of the fraud to proxy for the degree of discretion exercised to perpetrate the fraud. We find that the accrual estimation errors exhibit the strongest association with the existence and the magnitude of fraud and non-fraud restatements. Further, our results suggest that total accruals could be a low-cost alternative to many commonly used measures of discretionary accruals in detecting smaller fraud. The accrual estimation errors have incremental explanatory power over total accruals for both smaller and larger frauds.
Number of Pages in PDF File: 45
Keywords: Discretionary accruals, Earnings management, Fraud, Restatements, M-score
JEL Classification: M41working papers series
Date posted: May 18, 2006 ; Last revised: December 24, 2007
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