Abstract
ABSTRACT Context: measurement of earnings management usually requires multi-step models for computation. After examining the literature through bibliometrics studies, literature review, and research databases, we found that the Standard Jones model and its subsequent modifications are those that have more prominent use. Much of this research is potentially interesting for business theories related to earnings quality and accounting manipulation; however, it is difficult to be understood by junior researchers and practitioners, because they are not clearly described in the literature or the steps may be easy to confuse. Objective: in this tutorial, we present several key concepts about earnings management and explain, step by step, how to measure it. Method: our tutorial considers measurement using the following models: Standard Jones, Modified Jones, Modified Jones with return on assets (ROA), and Modified Jones using Cash Flows and Accruals Reversals. Conclusions: our main contribution with this tutorial is to provide a step-by-step guide for future studies, so that they can be more comparable with each other when using measurement methods of earnings management.
Highlights
Financial statements should adequately portray summaries to distinguish differences in companies’ financial and economic positions (Healy & Wahlen, 1999)
In the literature, accountants and financial economists have recognized that reported results may be managed by a variety of idiosyncratic contexts inherent in accounting choices (Cornett, McNutt, & Tehranian, 2009)
A significant part of the research concerning earnings management has used the concept of quantity of discretionary accruals as a measurement of how managed the earnings were
Summary
Financial statements should adequately portray summaries to distinguish differences in companies’ financial and economic positions (Healy & Wahlen, 1999). In the literature, accountants and financial economists have recognized that reported results may be managed by a variety of idiosyncratic contexts inherent in accounting choices (Cornett, McNutt, & Tehranian, 2009). Discretionary accounting choices may misrepresent or provide more appropriate private information in financial statements (Menicucci, 2020). Their accounting decisions are reflected in the firm’s earnings measures (Walker, 2013). A significant part of the research concerning earnings management has used the concept of quantity of discretionary accruals as a measurement of how managed the earnings were. The definition of accruals indicates that their use temporarily improves or reduces reported earnings, since their composition is not immediately reflected in cash flows, and often depends on managerial judgment (Bergstresser & Philippon, 2006)
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