Changes in accounting estimates: An update of priors or an earnings management strategy of “last resort”?

Beaulieu, Philip; Hayes, Louise; Timoshenko, Lev M.

doi:10.1111/jbfa.12644

Cited by 4 publications

(6 citation statements)

References 85 publications

(156 reference statements)

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“…A number of studies show that CAEs are associated with earnings management (e.g. DeFond et al, 2019;Albrecht et al, 2022;Beaulieu et al, 2023). The higher dollar impact of 10-K CAEs we document above could suggest a higher likelihood of using CAEs for earnings management during the pandemic.…”

Section: Changes In Accounting Estimatesmentioning

confidence: 65%

“…Regulators and practitioners have also expressed concerns that managers could use CAEs opportunistically for self-serving reporting objectives (KPMG, 2016;Ernst and Young, 2017;Pakaluk, 2017). Consistent with this view, academic research shows that the occurrence of CAEs is associated with poor financial reporting quality and audit quality (DeFond et al, 2019;Albrecht et al, 2022;Beaulieu et al, 2023).…”

mentioning

confidence: 76%

“…Specifically, Albrecht et al (2022) find that management is more likely to disclose positive (negative) CAEs when the company is likely to miss (already exceeds) consensus analyst forecasts. Financial reports with CAEs are more likely to be restated, to have higher discretionary accruals and lower readability, and to receive SEC comment letters (DeFond et al, 2019;Albrecht et al, 2022;Beaulieu et al, 2023). The use of CAEs to manage earnings during the COVID-19 pandemic is a particular concern because managers may take advantage of the compromised oversight by external auditors and audit committees.…”

Section: Literature Review and Hypothesis Developmentmentioning

confidence: 99%

“…US GAAP requires managers to make estimates and assumptions that convey management's forward-looking information, which can potentially help to predict firms' future cash flows and earnings (Beaulieu et al, 2023). Accounting estimates ensure the relevance and reliability of financial reports, and they have a direct impact on firms' reported financial performance.…”

Section: Introductionmentioning

confidence: 99%

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Changes in accounting estimates during the COVID-19 pandemic in the USA

Li,

Luo

2023

ARA

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PurposeThe authors investigate how managers adapt their financial reporting and disclosure practices in response to the COVID-19 pandemic through changes in accounting estimates (CAEs).Design/methodology/approachThe authors define the pandemic period as starting on March 1, 2020. The sample consists of 9,575 CAEs disclosed in quarterly (10-Qs) and annual (10-Ks) financial reports by US firms between January 1, 2004 and May 31, 2022. The authors perform multivariate analyses of the impact of the COVID-19 pandemic on the incidence of CAEs and on whether the impact of CAEs on firms' financial performance and reporting quality changes during the pandemic.FindingsIn the examination of the CAE footnote disclosures in the quarterly (10-Qs) and annual (10-Ks) reports of US companies, the authors find no evidence that the incidence of CAEs in 10-Ks or the number of firms reporting CAEs are significantly different in the pre-pandemic and pandemic periods, but the incidence of CAEs in 10-Qs is significantly higher in the pandemic period than in the pre-pandemic period. The authors also find that the number of CAEs related to revenue recognition increase significantly in the pandemic period, but CAEs in other categories decrease, with the sharpest drop seen in the liabilities category. Further investigation suggests that although the dollar impact of 10-K CAEs on current financial statements is higher during the pandemic period, firms with CAEs, especially positive CAEs, in either 10-Ks or 10-Qs are less likely to use CAEs to boost earnings in the pandemic period. However, the authors find evidence that firms tend to use CAEs to “big bath” current earnings and create reserve for future period. The authors have not observed any significant differences in how the various phases of the pandemic affect the reporting of CAEs. Additionally, there is no evidence to suggest that financially distressed firms report more or fewer CAEs during the pandemic.Practical implicationsThe results are consistent with the notion that, during the pandemic, firms exercise greater caution in their CAE disclosures, refraining from using CAEs as a means of boosting earnings but as a strategy to create reserve for future period. The paper highlights the challenges that various stakeholders face when assessing a company's current and future financial performance based on management's accounting estimates.Originality/valueThis study captures the impact of the COVID-19 pandemic on the incidence of CAEs and CAEs' impact on the financial performance and financial reporting quality of firms during the pandemic.

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Section: Changes In Accounting Estimatesmentioning

confidence: 65%

mentioning

confidence: 76%

Section: Literature Review and Hypothesis Developmentmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

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Changes in accounting estimates during the COVID-19 pandemic in the USA

Li,

Luo

2023

ARA

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“…The articulation of the financial statements means that the balance sheet acts as a constraint to accruals management (Barton and Simko, 2002); prior accrual choices accumulate and eventually reverse, imposing limits to accrual accounting. As a last resort managers may rely on changes in accounting estimates to manipulate earnings (Beaulieu et al., 2022). Finally, in a quarterly setting, the integral method may also limit flexibility, likely triggering a substitution between earnings management instruments.…”

Section: Introductionmentioning

confidence: 99%

Quarterly earnings guidance and real earnings management

Osma

Saorín

Mercado

2022

Business Fin & Account

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We examine if quarterly earnings guidance induces real earnings management. Quarterly guidance may cause myopia and inefficient decision-making, if managers become overly concerned with setting and beating short-term earnings targets. We test these associations on a large sample of US firms. Our evidence suggests that quarterly guidance is informative and lowers myopic incentives. However, our analyses also reveal endogenous associations exist between guidance and real earnings management. In contrast with existing concerns over frequent guiders, we find that guidance appears problematic in infrequent guiders, and in firms that issue good news earnings guidance and that operate in settings where earnings pressures are high.

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The moderating role of duality split on the relationship between CEO narcissism and earnings management

Azevedo,

Silva,

Nakao

2024

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Purpose The purpose of this study is to examine the moderating effect of an exogenous corporate governance shock that curbs Chief Executive Officers’ (CEOs) power on the relationship between CEO narcissism and earnings management practices. Design/methodology/approach The authors performed a quasi-experiment using a differences-in-differences approach to examine Brazil’s duality split regulatory change on 101 Brazilian public firms during the period 2010–2022. Findings The main findings indicate that the introduction of duality split curtails the positive influence of CEO narcissism on earnings management, suggesting that this corporate governance regulation may act as a complementary corporate governance mechanism in mitigating the negative consequences of powerful narcissistic CEOs. Further robustness checks indicate that the results remain consistent after using entropy balancing and alternative measures of CEO narcissism. Practical implications In emerging markets, where governance systems are frequently perceived as less than optimal, policymakers and regulatory authorities can draw insights from this enforcement to shape governance systems, reducing CEO power and, consequently, improving the quality of financial reporting. Originality/value To the best of the authors’ knowledge, this is the first study to examine whether a duality split mitigates the influence of CEO narcissism on earnings management. Thus, this study contributes to the corporate governance literature that calls for research on the effectiveness of external corporate governance mechanisms in emerging markets as well as the CEO narcissism literature that calls for research on moderating factors that could curtail negative consequences of narcissistic CEO behavior.

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Changes in accounting estimates: An update of priors or an earnings management strategy of “last resort”?

Cited by 4 publications

References 85 publications

Changes in accounting estimates during the COVID-19 pandemic in the USA

Changes in accounting estimates during the COVID-19 pandemic in the USA

Quarterly earnings guidance and real earnings management

The moderating role of duality split on the relationship between CEO narcissism and earnings management

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