Earnings Quality and Earnings Management

The primary product of financial reporting is net
income or earnings as a measure of performance.
Earnings are the summary measure of firm performance
produced under the accrual basis of accounting.
Earnings are important since they are used as a
summary measure of firm performance by a wide range
of users, for instance for executive compensation
plans or in debt covenants.
Accruals are at the heart of Financial Reporting.
The primary role of accruals is to overcome problems
with measuring firm performance when firms are in
continuous operation. Accruals shift or adjust the
recognition of cash flows over time, so that the
adjusted number, i.e. earnings, better measures firm
performance. However, accruals can also be used to
manage earnings. As a result, accruals play a major
role in the determination of the quality of reported
earnings. This study provides an overview of the
role of accruals in financial reporting. In the
empirical analysis, the manner in which accruals
adjust cash flows is examined for respectively the
prediction of future cash flows, growth and losses

Autorentext
Dr. Sanjay Bissessur graduated form the University of Amsterdam in the Netherlands, where he received degrees in Accounting and Finance. He is currently an Assistant Professor at the Accounting Section of the University of Amsterdam.

Klappentext
The primary product of financial reporting is net income or earnings as a measure of performance. Earnings are the summary measure of firm performance produced under the accrual basis of accounting. Earnings are important since they are used as a summary measure of firm performance by a wide range of users, for instance for executive compensation plans or in debt covenants. Accruals are at the heart of Financial Reporting. The primary role of accruals is to overcome problems with measuring firm performance when firms are in continuous operation. Accruals shift or adjust the recognition of cash flows over time, so that the adjusted number, i.e. earnings, better measures firm performance. However, accruals can also be used to manage earnings. As a result, accruals play a major role in the determination of the quality of reported earnings. This study provides an overview of the role of accruals in financial reporting. In the empirical analysis, the manner in which accruals adjust cash flows is examined for respectively the prediction of future cash flows, growth and losses