Disclosure Transparency about Activity in Valuation Allowance and Reserve Accounts and Accruals-based Earnings Management

Posted: 14 Jun 2014 Last revised: 5 Jan 2016

See all articles by Cory A. Cassell

Cory A. Cassell

University of Arkansas

Linda A. Myers

University of Tennessee, Haslam College of Business, Accounting and Information Management

Timothy A. Seidel

Brigham Young University

Date Written: February 1, 2015

Abstract

We examine the relation between the transparency of disclosures about activity in valuation allowance and reserve accounts and accruals-based earnings management. We classify disclosures as being transparent if they provide detailed information about activity in the allowance and reserve accounts during the fiscal period. We find strong evidence that the extent of accruals-based earnings management is lower among companies with transparent disclosures than among companies without transparent disclosures. We also investigate whether the extent of accruals-based earnings management is lower for companies that provide transparent disclosures in one comprehensive schedule (i.e., the Schedule II) relative to those that provide transparent disclosures spread throughout the notes to the financial statements. Although regulators have expressed concern that the omission of a Schedule II could indicate a greater likelihood of earnings management, our results indicate that it is the omission of transparent disclosures rather than the omission of a comprehensive schedule outlining activity in the allowance and reserve accounts that affects earnings management. Our findings suggest that regulators, auditors, and investors should consider subjecting companies that fail to provide transparent disclosures to additional scrutiny.

Keywords: disclosure transparency; valuation allowances and reserves; Schedule II; earnings management; discretionary accruals; management discretion

JEL Classification: M40, M41

Suggested Citation

Cassell, Cory A. and Myers, Linda A. and Seidel, Timothy A., Disclosure Transparency about Activity in Valuation Allowance and Reserve Accounts and Accruals-based Earnings Management (February 1, 2015). Accounting, Organizations and Society, Vol. 46, 2015. Available at SSRN: https://ssrn.com/abstract=2449379 or http://dx.doi.org/10.2139/ssrn.2449379

Cory A. Cassell

University of Arkansas ( email )

Business Bldg. 454
Fayetteville, AR 72701
United States

Linda A. Myers

University of Tennessee, Haslam College of Business, Accounting and Information Management ( email )

Knoxville, TN
United States

Timothy A. Seidel (Contact Author)

Brigham Young University ( email )

Provo, UT 84602
United States

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