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Do Models of Discretionary Accruals Detect Actual Cases of Fraudulent and Restated Earnings? An Empirical Analysis *

Do Models of Discretionary Accruals Detect Actual Cases of Fraudulent and Restated Earnings? An... Contemporary Accounting Research profile accounting scandals, such as Enron, HealthSouth, Qwest, Rite Aid, Tyco, Waste Management, and Xerox. The total amount of restated earnings for the fraud-year observations is $13.3 billion. The mean and median restated earnings over beginning assets are 14.0 percent and 4.4 percent, respectively. Our control sample consists of the entire population of COMPUSTAT firms for which data are available to estimate the discretionary accrual models. We also examine a small sample of nonfraudulent restatements. We examine two questions concerning fraud. First, are the various measures of discretionary accruals associated with the existence of a fraudulent event in the first place? We estimate a logit model to examine the relationship between fraudulent earnings and discretionary accruals, accrual estimation errors, and the Beneish 1999 probabilities of earnings manipulation.1 We include total assets, return on assets, leverage, and auditor type as controls. We find that all 10 measures are significantly associated with a fraudulent event. However, only the accrual estimation errors estimated from cross-sectional models of working capital changes on past, present, and future cash flows (Dechow and Dichev 2002), the McNichols (2002) modification of Dechow and Dichev 2002, and the Beneish (1997, 1999) probability of earnings http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Contemporary Accounting Research Wiley

Do Models of Discretionary Accruals Detect Actual Cases of Fraudulent and Restated Earnings? An Empirical Analysis *

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References (15)

Publisher
Wiley
Copyright
2008 Canadian Academic Accounting Association
ISSN
0823-9150
eISSN
1911-3846
DOI
10.1506/car.25.2.8
Publisher site
See Article on Publisher Site

Abstract

Contemporary Accounting Research profile accounting scandals, such as Enron, HealthSouth, Qwest, Rite Aid, Tyco, Waste Management, and Xerox. The total amount of restated earnings for the fraud-year observations is $13.3 billion. The mean and median restated earnings over beginning assets are 14.0 percent and 4.4 percent, respectively. Our control sample consists of the entire population of COMPUSTAT firms for which data are available to estimate the discretionary accrual models. We also examine a small sample of nonfraudulent restatements. We examine two questions concerning fraud. First, are the various measures of discretionary accruals associated with the existence of a fraudulent event in the first place? We estimate a logit model to examine the relationship between fraudulent earnings and discretionary accruals, accrual estimation errors, and the Beneish 1999 probabilities of earnings manipulation.1 We include total assets, return on assets, leverage, and auditor type as controls. We find that all 10 measures are significantly associated with a fraudulent event. However, only the accrual estimation errors estimated from cross-sectional models of working capital changes on past, present, and future cash flows (Dechow and Dichev 2002), the McNichols (2002) modification of Dechow and Dichev 2002, and the Beneish (1997, 1999) probability of earnings

Journal

Contemporary Accounting ResearchWiley

Published: Jun 1, 2008

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