Discussion of 'Detecting Earnings Management: A New Approach'

Journal of Accounting Research, Forthcoming

Posted: 10 Feb 2012

See all articles by Joseph Gerakos

Joseph Gerakos

Tuck School of Business at Dartmouth College

Date Written: January 31, 2012

Abstract

Dechow, Hutton, Kim, and Sloan (2012) propose a novel approach to identify accruals-based earnings management. Their approach is based on the concept that accruals-based earnings management made in one period must reverse in a subsequent period. By attempting to model the dynamic nature of accruals-based earnings management, they make a significant contribution to the literature on identifying earnings management. There are, however, several concerns that limit the effectiveness of their approach. First, it relies on the traditional methods of estimating discretionary accruals. Their approach is therefore subject to the estimation problems of these traditional methods. Second, their approach does not take advantage of dynamic features of the firm’s accounting numbers arising from the reversal of manipulated accruals. It instead tests whether there are group differences in the levels of discretionary accruals based on whether firms engaged in earnings management. Third, their approach assumes that the researcher already knows the periods in which earnings management occurred and reversed. It provides no guidance in identifying these periods.

Suggested Citation

Gerakos, Joseph, Discussion of 'Detecting Earnings Management: A New Approach' (January 31, 2012). Journal of Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2002090

Joseph Gerakos (Contact Author)

Tuck School of Business at Dartmouth College ( email )

Hanover, NH 03755
United States

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