Internal control system, earnings quality, and the dynamics of financial reporting.
Using an earnings management model in which managers manipulate information when the firm's control system fails, I introduce a measure of earnings quality, based on the notion of integral precision, that has solid theoretical foundations. A trade-off between the frequency and the magnitude of overs...
| Published in: | RAND Journal of Economics (Wiley-Blackwell) Vol. 44; no. 1; pp. 145 - 168 |
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| Format: | Article |
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Wiley-Blackwell
Spring2013
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| Online Access: | View this record in EBSCOhost |
| Summary: | Using an earnings management model in which managers manipulate information when the firm's control system fails, I introduce a measure of earnings quality, based on the notion of integral precision, that has solid theoretical foundations. A trade-off between the frequency and the magnitude of overstatements is shown: overstatements are larger when misreporting is less likely. Overall, the model generates a distribution of earnings announcements similar to its empirical analogue and provides a structural method to identify the likelihood and magnitude of misreporting by exploiting information from the moments of the distribution of reported earnings. |
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