Enterprise risk management and accruals estimation error

Abstract

We examine the association between an enterprise risk management (ERM) program and accruals estimation error. ERM helps firms identify, assess, and manage risks at the enterprise level. We argue that through ERM managers gain a better understanding of firm processes and can more accurately estimate accruals. Using a sample of 11,538 firm-year observations from 2007 to 2011, we measured accruals estimation error and the choice to disclose an ERM program simultaneously using full information maximum likelihood. We find that having an ERM program is negatively related to accruals estimation error and that having an ERM program is positively associated with signed abnormal accruals, suggesting that our findings are not due to reduced earnings management. Our results are consistent with the theory that ERM improves managers’ understanding of the firm and its potential risks. Our study is relevant to academics how study ERM and practitioners and managers who are considering implementing ERM.