Detecting GAAP Violation: Implications for Assessing Earnings Management Among Firms with Extreme Financial Performance
1997, Journal of Accounting and Public Policy
Messod Daniel Beneish
A paper presents a model to detect earnings management among firms experiencing extreme financial performance and compares the model's performance to that of discretionary accrual models. The analysis found that the model provides timely assessments of the likelihood of manipulation, and that the model-based trading strategies earn significant abnormal returns. The paper also presents evidence suggesting that the specification of discretionary accrual models could be enhanced by adding lagged total accruals and a measure of past price performance as explanators. The evidence arises from studying actual instances of earnings management. Its implications are in line with the Guay et al. (1996) conjecture that accrual models which take into account managers' incentives, and recognize that discretionary accruals reverse, have a better chance of identifying discretionary accruals. The results have implications for researchers investigating managers' accrual decisions in contexts such as security offerings and financial distress, where extreme performance limits the usefulness of accrual models.
Beneish, Messod D. (1997), "Detecting GAAP Violation: Implications for Assessing Earnings Management Among Firms with Extreme Financial Performance," Journal of Accounting and Public Policy, Vol. 3, Fall, pp. 271-309.