Is the Sky Falling? New Evidence on Accruals Quality Over Time and Around the World

Abstract

Prior research finds evidence suggesting a long-term trend of declining accruals quality in the U.S. Using the Dechow and Dichev (2002) accruals quality measure, we provide new evidence that this decline began to reverse around 2000, with accruals quality generally improving through 2016. We find that this pattern is primarily attributable to trends in the volatility of underlying firm performance over time, suggesting that “low” accruals quality is not necessarily a product of a poorly functioning accounting system or management discretion, but rather reflects the economic (cash flow) uncertainty of the firm’s operating environment. We corroborate these results in a battery of additional tests, which explore alternative explanations. We also find that the inverse relation between the intertemporal patterns of accruals quality and cash flow volatility is robust across different regions of the world and different business environments. Overall, our evidence suggests that concerns about a systemic decline in earnings and accruals quality are overstated.