Does benchmark-beating detect earnings management? Evidence from accounting irregularities

David G. Harris, Linna Shi, Hong Xie

Research output: Contribution to journalArticlepeer-review

7 Scopus citations

Abstract

We examine whether meeting or slightly beating an earnings benchmark (benchmark-beating) is (1) associated with accounting irregularities, an extreme and certain case of earnings management, (2) useful for detecting accounting irregularities both incremental and relative to discretionary accruals and to F-scores (Dechow, Ge, Larson, & Sloan, 2011), and (3) more useful for detecting opportunistic accounting irregularities, a more harmful form of earnings manipulation identified in Badertscher, Collins, and Lys (2012), than accounting irregularities in general. We identify an accounting irregularity sample where earnings are restated due to intentional misreporting and construct a control sample where earnings are not restated. We find that benchmark-beating is significantly positively associated with the probability of accounting irregularities after controlling for other determinants of accounting irregularities. In addition, benchmark-beating is useful for detecting accounting irregularities incremental to discretionary accruals and F-scores; benchmark-beating ties with and sometimes outperforms discretionary accruals for detecting accounting irregularities in a one-on-one horse race but is dominated by F-scores. Finally, benchmark-beating is more useful for detecting opportunistic accounting irregularities than accounting irregularities in general. Overall, we contribute to the literature by validating benchmark-beating as a proxy for earnings management.

Original languageEnglish
Pages (from-to)25-45
Number of pages21
JournalAdvances in Accounting
Volume41
DOIs
StatePublished - Jun 2018

Bibliographical note

Funding Information:
We thank Laurel Franzen, Brian Bratten, Monika Causholli, Joseph Comprix , David Hulse, Badr Ismail , Danny Lanier , Lihong Liang, Jeff Payne, Bob Ramsay, Dan Stone, David Weinbaum , David Ziebart and workshop participants at University of Kentucky, Syracuse University, the 2010 New York Accounting and Finance Forum, and the 2013 American Accounting Association Annual Meeting for helpful comments and suggestions. We also thank Karen Hennes, Andrew Leone, and Brian Miller for generously sharing their financial reporting irregularity dataset and Thomson Financial for providing analyst forecast data through the Institutional Brokers Estimate System (I/B/E/S). Hong Xie gratefully acknowledges financial support from the Von Allmen Research Support endowment and the PWC Fellowship endowment at University of Kentucky.

Publisher Copyright:
© 2018 Elsevier Ltd

Keywords

  • Accounting fraud
  • Accounting irregularities
  • Benchmark-beating
  • Earnings benchmarks
  • Earnings management

ASJC Scopus subject areas

  • Accounting
  • Finance

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