Managerial discretion in revenue recognition amidst financial restatements and implications for GAAP compliance

Abstract

In this study, we examine GAAP-compliant and noncompliant revenue accruals among non-fraud, non-error restated firm-years. The restatement setting isolates and quantifies managerial discretion in the revenue recognition process and provides insight into the role of GAAP compliance in producing predictive information. We find consistent evidence that non-GAAP-compliant revenue accruals are predictive of future cash receipts and total sales. We find that this main result is strongest for accrued revenues rather than deferred revenues. We find additional evidence that non-GAAP-compliant revenue accruals are generally more or similarly predictive of future cash receipts or total sales when compared to GAAP-compliant revenue accruals for both restated and non-restated firm-years.Our findings suggest that managers' discretion provides predictive information in the restatement setting, where managers' judgment is likely most prevalent. We also find that ex-post compliance with US GAAP does not isolate and remove less predictive information. Last, we fail to find reliable evidence that managers in our sample use their discretion over revenue accruals to smooth revenues or to meet or beat revenue and earnings benchmarks.

Investor relations under short‐selling pressure: Evidence from strategic signaling by company site visits

“…Next, we employ the entropy balancing method to create another appropriate control sample. Compared to other matching methods, EBM has two major advantages: (1) preserving the full sample and (2) obtaining a high degree of covariate balance (e.g., Burnett et al., 2021; C. Chen et al., 2021). We follow Glendening et al.…”

“…(2019) and balance the two moments (mean and variance) of control variables used in the baseline regression across observations with and without short‐selling deregulation in the city. We also include industry and year dummies (e.g., Burnett et al., 2021). Panel B of Table 3 reports the descriptive statistics of matching variables for treatment and control firms after weighting.…”

“…without short-selling deregulation in the city. We also include industry and year dummies (e.g., Burnett et al, 2021).…”

Aplicación del modelo de sistema corporativo abierto para el manejo de la contabilidad administrativa del Grupo Empresarial SACSA

“…Asimismo, Burnett et al (2021) destacan que el cumplimiento ex post de la información contable permite un manejo discrecional de las operaciones de la organización, de ahí que la contabilidad administrativa permite el control discrecional de la acumulación de ingresos y la reexpresión financiera a través del proceso de auditoría y reconocimiento discrecional que se realiza desde el control interno de la organización, lo que permite con mayor certeza la generación de información predictiva en el mediano y largo plazo. Los hallazgos sugieren que la discreción de los administradores o gerentes proporciona información predictiva en el entorno de la represión financiera, donde el juicio de los gerentes es probablemente más frecuente.…”

The joint influence of Sarbanes‐Oxley and FAS123R on financial misreporting

“…However, we acknowledge that discretionary accruals are noisy proxies of earnings management that yield low power results, and biased estimates in certain samples. The prior literature raises a number of concerns regarding the ability of discretionary accruals to capture earnings manipulation(Christensen et al, 2022;Burnett et al, 2021) Chen et al (2018). andChristodoulou et al (2018) suggest that using discretionary accruals, measured as residuals from a nondiscretionary accrual prediction model, can result in biased coefficients and standard errors that can lead to incorrect inferences.…”