Modelling Receivables and Deferred Revenues to Detect Revenue Management
Abacus, 2018, Vol. 54 (2), pp. 181-209, Special Issue on Earnings Management
41 Pages Posted: 15 Apr 2014 Last revised: 26 Jul 2018
Date Written: June 15, 2017
This study develops and calibrates a revenue accruals model. Changes in accounts receivable and deferred revenues are modeled using the respective income statement and cash flow numbers (i.e., revenues and cash flows from sales) that relate directly to the accruals’ origination and reversal. Compared to existing models, the proposed specification explains more variation in the data and, in simulations with seeded revenue manipulation, exhibits greater detection power and less bias. Furthermore, the abnormal revenue estimates are positively associated with cases of revenue misstatements identified by the SEC. Results imply that researchers, auditors, and regulators interested in detecting earnings management should focus on modeling specific accruals. As a practical matter, for detecting revenue management, they should consider broadening their scope to examine not only accounts receivable but also current and long-term deferred revenues.
Keywords: Accounts receivable; Deferred revenues; Discretionary accruals; Earnings management; Revenue management; Revenue recognition
JEL Classification: K22, G18, M40, M41, M49
Suggested Citation: Suggested Citation