Implications of the Integral Approach and Earnings Management for Alternate Annual Reporting Periods

47 Pages Posted: 14 Jun 2007 Last revised: 1 Nov 2012

See all articles by Katherine Gunny

Katherine Gunny

University of Colorado at Denver

John Jacob

University of Colorado at Boulder - Department of Accounting

Bjorn Jorgensen

Date Written: November 1, 2012

Abstract

We compare earnings for the last twelve months ending in quarter four (i.e., fiscal year earnings), three, two and one. Prior literature offers two competing explanations for why fourth quarter earnings exhibit higher volatility than other interim quarters. Under the first explanation, GAAP assumes that quarterly earnings are an integral part of annual earnings and are used to settle up annual earnings. Any estimation errors in the preceding three quarters are corrected through fourth quarter earnings, which could make them more volatile. Under the second explanation, compensation and lending contracts based on fiscal year earnings lead to a concentration of earnings management in the fourth quarter and thus more volatile fourth quarter earnings. Although both explanations have similar predictions for the properties of quarterly earnings, our simulations show that these explanations, as suggested by Lipe and Bernard 2000, have distinct implications for the properties of annual earnings ending in quarter four, three, two and one. Overall, our results are more consistent with earnings management than settling up. In addition, we examine the relative earnings attributes and find that fiscal year earnings attributes rank lower on dimensions of accrual quality, persistence, predictability, and smoothness. Finally, we re-investigate the accrual anomaly and find that the accrual anomaly is more pronounced for fiscal year earnings.

Keywords: Accruals, earnings management, earnings attributes, accrual anomaly, integral approach

JEL Classification: M41, M43, G12, G14

Suggested Citation

Gunny, Katherine and Jacob, John and Jorgensen, Bjorn N, Implications of the Integral Approach and Earnings Management for Alternate Annual Reporting Periods (November 1, 2012). AAA 2008 Financial Accounting and Reporting Section (FARS) Paper, Available at SSRN: https://ssrn.com/abstract=992068 or http://dx.doi.org/10.2139/ssrn.992068

Katherine Gunny (Contact Author)

University of Colorado at Denver ( email )

Box 173364
1250 14th Street
Denver, CO 80217
United States

John Jacob

University of Colorado at Boulder - Department of Accounting ( email )

419 UCB
Boulder, CO 80309-0419
United States
303-735-6335 (Phone)

No contact information is available for Bjorn N Jorgensen

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