The Allowance for Uncollectible Accounts, Conservatism, and Earnings Management

Journal of Accounting Research 48 (3) June 2010

46 Pages Posted: 27 Nov 2009 Last revised: 19 Apr 2017

See all articles by Scott B. Jackson

Scott B. Jackson

University of South Carolina

Xiaotao Kelvin Liu

Northeastern University - Accounting Group

Date Written: November 20, 2009

Abstract

We study the interrelation between conservatism and earnings management by examining the allowance for uncollectible accounts and its income statement counterpart, bad debt expense. We find that the allowance is conservative and that it has become more conservative over time. Conservatism may, however, facilitate earnings management. We find that firms manage bad debt expense downward (and even record income-increasing bad debt expense) to meet or beat analysts’ earnings forecasts and that conservatism accentuates the extent to which firms manage bad debt expense. Further, we find that firms manage bad debt expense downward by drawing down previously recorded over-accruals of bad debt expense that have accumulated on the balance sheet. An implication of our study is that tighter limits on the amount by which firms are permitted to understate net assets may reduce their ability to manage earnings.

Keywords: Conservatism, earnings management, the allowance for uncollectible accounts, bad debt expense

JEL Classification: M14, M41, M48

Suggested Citation

Jackson, Scott B. and Liu, Xiaotao Kelvin, The Allowance for Uncollectible Accounts, Conservatism, and Earnings Management (November 20, 2009). Journal of Accounting Research 48 (3) June 2010, Available at SSRN: https://ssrn.com/abstract=1321443

Scott B. Jackson (Contact Author)

University of South Carolina ( email )

School of Accounting
Moore School of Business
Columbia, SC 29208
United States
(803) 777-3100 (Phone)

Xiaotao Kelvin Liu

Northeastern University - Accounting Group ( email )

404B Hayden Hall
360 Huntington Avenue
Boston, MA 02115
United States
617-373-5926 (Phone)

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