Changes in Accounting Estimates: Managerial Opportunism or Risky Firms?

Baruch College Zicklin School of Business Research Paper No. 2019-02-01

55 Pages Posted: 29 Jan 2019 Last revised: 3 Dec 2019

See all articles by Al (Aloke) Ghosh

Al (Aloke) Ghosh

UNC Charlotte

Subprasiri Siriviriyakul

City University of New York (CUNY) - Baruch College

Date Written: November 11, 2019

Abstract

We investigate whether companies strategically change accounting estimates to manipulate earnings, as some claim (“opportunism” hypothesis), or whether these modifications represent changes in the underlying fundamentals of financially troubled or risky companies updating their priors about future expectations because of operational changes (“risk” hypothesis). Using audit fees, propensity to meet or beat earnings forecasts, and restatements as surrogates for managerial opportunism/bias, we find evidence consistent with the risk hypothesis and inconsistent with opportunism hypothesis. Further, consistent with the risk hypothesis, over the years prior to the estimate changes, companies are more prone to idiosyncratic risks such as going concern problems, misstatements, discontinued operations, corporate restructuring, charge-offs, and internal control problems. The lack of evidence supporting the opportunism hypothesis is not surprising because, under US GAAP, companies are required to disclose the “dollar effect” of an accounting estimate change on net income in their financial statements.

Keywords: change in accounting estimates, audit effort, audit fees, and earnings management

JEL Classification: M40, M41, M42

Suggested Citation

Ghosh, Al (Aloke) and Siriviriyakul, Subprasiri, Changes in Accounting Estimates: Managerial Opportunism or Risky Firms? (November 11, 2019). Baruch College Zicklin School of Business Research Paper No. 2019-02-01. Available at SSRN: https://ssrn.com/abstract=3317064 or http://dx.doi.org/10.2139/ssrn.3317064

Al (Aloke) Ghosh (Contact Author)

UNC Charlotte ( email )

9201 University City Blvd
Charlotte, NC 28223
United States

HOME PAGE: http://www.alokeghosh.com

Subprasiri Siriviriyakul

City University of New York (CUNY) - Baruch College ( email )

Box B12-225 One Bernard Baruch Way
Stan Ross Dept of Accountancy
New York, NY 10010
United States
6463123247 (Phone)

Register to save articles to
your library

Register

Paper statistics

Downloads
98
Abstract Views
827
rank
276,724
PlumX Metrics