Changes in Accounting Estimates: Underlying Economic Reality or Earnings Management

Ghosh, Aloke; Siriviriyakul, Subprasiri

doi:10.2139/ssrn.3317064

Cited by 2 publications

(14 citation statements)

References 27 publications

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“…While changes in estimates are more transparent than some other ways used to manage earnings, companies may resort to earnings management through accounting estimates changes when they have used up their flexibility within GAAP to manage earnings by other means. This result, that companies with reduced leeway within GAAP on their balance sheets may resort to transparent income‐increasing estimate changes to manage earnings, extends Barton and Simko (2002) and reconciles the mixed conclusions in concurrent research (Albrecht et al., 2020; Ghosh & Siriviriyakul, 2019) as to the reasons for changes in accounting estimates. Our results may stimulate future research on earnings management using specific accounts and supplement the emerging literature in this area (e.g., DeFond et al., 2018).…”

Section: Introductionsupporting

confidence: 70%

“…(2015) find that transparent disclosure lowers the extent of accruals‐based earnings management. Ghosh and Siriviriyakul (2019) also argue that management is unlikely to use changes in accounting estimates to bias earnings since market participants can easily determine the effect of the bias given disclosure requirements. Consistent with this argument and Cassell et al.’s (2015) evidence, they find that in the years prior to a change in accounting estimate, companies are more prone to internal control issues, misstatements, restructuring and other risks associated with a misstatement.…”

Section: Background and Hypothesis And Research Questions Developmentmentioning

confidence: 99%

“…Given conflicting conclusions in prior research (Albrecht et al, 2020;Ghosh & Siriviriyakul, 2019), we begin by testing a prediction that changes in accounting estimates overall are positively related to subsequent restatements.…”

Section: Introductionmentioning

confidence: 97%

“…With the increasing use of estimates in financial reporting (Barth, 2006; Lev et al., 2010), research on the determinants of material changes in accounting estimates continues to grow (Albrecht et al., 2020; DeFond et al., 2018; Ghosh & Siriviriyakul, 2019). While changes in accounting estimates may be advantageous “if managers’ intent is to accurately signal expected performance or to smooth earnings volatility to better portray the firm's true trajectory,” changes in estimates may also be made with the intent to mislead (T. E. Christensen et al., 2021, p.541).…”

Section: Introductionmentioning

confidence: 99%

“…While changes in accounting estimates may be advantageous “if managers’ intent is to accurately signal expected performance or to smooth earnings volatility to better portray the firm's true trajectory,” changes in estimates may also be made with the intent to mislead (T. E. Christensen et al., 2021, p.541). Evidence from prior research provides mixed results about whether estimate changes are strategically motivated (Albrecht et al., 2020) or reflect new or updated information (Ghosh & Siriviriyakul, 2019). The distinction is important.…”

Section: Introductionmentioning

confidence: 99%

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

Beaulieu

Hayes

Timoshenko

2022

Business Fin & Account

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Evidence from prior research is mixed about whether accounting estimate changes are strategically motivated, on average, or whether they reflect new or updated information. To interpret this difference, we investigate, by category of material changes in accounting estimates, the association between estimate changes and subsequent restatements.We also explore the determinants of both income-increasing and income-decreasing estimate changes for different categories of estimate changes. We find that the motivations for and the determinants of estimate changes depend on the type of change and on whether the changes in estimates are income-increasing or income-decreasing. Overall, we conclude that when companies are motivated to bias earnings and they cannot do so by manipulating other within generally accepted accounting principles (GAAP) accruals, they sometimes resort to using estimate changes. Our more detailed investigation of estimate changes at the account level suggests a more nuanced view of the determinants of changes in accounting estimates. We develop a more complete model of the determinants of changes in accounting estimates than those used in this emerging literature, which should be of interest to accounting academics, regulators, audit practitioners and audit committee members.

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Section: Introductionsupporting

confidence: 70%

Section: Background and Hypothesis And Research Questions Developmentmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 97%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

See 3 more Smart Citations

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

Beaulieu

Hayes

Timoshenko

2022

Business Fin & Account

View full text Add to dashboard Cite

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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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Changes in Accounting Estimates: Underlying Economic Reality or Earnings Management

Cited by 2 publications

References 27 publications

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

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

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

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