Implications of the integral approach and earnings management for alternate annual reporting periods

Abstract

We compare the last 12 months’ earnings ending in quarter four (i.e., fiscal year earnings), three, two and one. Lipe and Bernard (2000) offer two competing explanations for higher volatility in fourth quarter earnings relative to other quarters. First, under the integral approach, any estimation errors in the earlier quarters are corrected through fourth quarter earnings, which could make them more volatile. Second, earnings management concentrated in the fourth quarter renders fourth quarter earnings more volatile. While both explanations have similar implications for the properties of quarterly earnings, their implications differ for the properties of annual earnings ending in each quarter. Our result comparing earnings variability is more consistent with earnings management than the integral approach. We examine the relative earnings attributes and find that fiscal year earnings attributes rank lower. Finally, we re-investigate the accrual anomaly and find that the accrual anomaly is more pronounced for fiscal year earnings.