Introduction: Earnings quality could be defined as the reduction of the market’s uncertainty about the firm’s terminal value (liquidating cash flow) due to the earnings report (Ewert et al., 2009). It has been the subject of numerous empirical studies that analyze trends over time and across countries, evaluate effects of changes in accounting standards, auditing, enforcement and corporate governance, and examine its relationship with the cost of capital (Ewert, 2015, p.1). ‘It is also one of the most important characteristics of financial reporting systems’ (Ewert, 2009). High quality is said to improve capital market efficiency, therefore investors and other users should be interested in high-quality financial accounting information. (Ewert,2009). There is no direct way to observe earnings quality, most of literatures used a range of proxies to present different measures (Perotti et al., 2014). Most of these measures are based on intangible concepts about adorable characteristic of accounting systems (Perotti et al., 2014). However, literatures analysis earnings quality through different ways, some of them might have the analyses cross time and determinants, while others evaluate effects from changes of accounting criteria, enforcement systems, even might be corporate governance requirements within or across countries (Perotti et al., 2014). For these measures, usually they would be separated for two types: accounting-based and market-based. Accounting-based measures
When analysts question a firm’s earnings quality, it raises concerns regarding under or over aggressive accounting practices that may be allowing the firm to manipulate the earnings. Earnings quality is defined as the strength of the current earnings in being used to predict future earnings and cash flows. Since earning quality is indicative of future performance, analysts are more likely to address issues that have substantial impact on the earnings quality. An issue arises when the nature of the earnings is questioned. While permanent earnings are part of normal operations, any irregular, one time earnings can skew the earnings, making the firm look more profitable than it is. This is due to the inability to recreate similar one-time transactions that will give rise to such numbers. Investors prefer predictable
Such an intense focus has been placed on quarterly earnings as an indication of a company’s success by everyone from analysts to executives that ethics have for the most part been thrown out the window, sacrificed to the all important number, i.e. earnings per share. This is the theory in Alex Berenson’s book “The Number: How the Drive for Quarterly Earnings Corrupted Wall Street and Corporate America.” This number has become part of a game to be played, a figure to be manipulated – beat the number and Wall Street all but throws a parade, miss it and a company’s stock may be abandoned. Take into account the incentives that executives have to beat the number and one can find plenty of reasons to manage earnings.
SFAC No. 8 addresses the cost constraint on useful financial reporting, “Cost is a pervasive constraint that standard setters, as well as providers and users of financial information, should keep in mind when considering the benefits of a financial reporting requirement.” (SFAC No. 8 BC 3.47) However, the ability to place a dollar value and fully enumerate a cost or benefit is almost an impossible task for standard-setters. Additionally, there is no way to successfully identify and measure all of the economic consequences associated with a new standard. The FASB should be applauded though for advancing uniformity in accounting standards, however; uniform financial reporting suggests a one size fits all approach. “Smaller, non-publicly listed firms (and their auditors) argue that accounting standards are formulated mainly for larger, publicly traded firms” and that “compliance costs are disproportionately higher and the
Quality of reported financial information is a critical element in evaluating financial statement data. The higher the quality of financial reporting, the more useful the information is for business decision making.
As the business environment grows and companies find new ways to expand into their respective - or even new – markets, it is important that reporting standards stay up to date with changes and continue to assist companies in providing their users with useful accounting information. Information is labelled as being useful when it meets the
The most important thing to any company’s stakeholders is high-quality reporting of its financial statements. Investors, for instance, need to know the truth about a company in order to make an informed decision on whether to make private investment, buy stock or bonds. However, for stakeholders to get the truth about a company, they need to read and understand management’s discussion and analysis, the president’s letter, the notes, as well as the financial statements. Conversely, financial statements must be accompanied with disclosures to prevent them from misleading the stakeholders.
This report is written as a response to the monograph in which the ICAEW published on how financial accounting disclosures can be improved. The aim of this report is to critically discuss and evaluate the worthwhileness of the recommendations made from a financial investor’s perspective. It is done by reviewing recommendations put forward by the ICAEW and analysing if each of the disclosure recommended is worth the effort while putting in perspective what effects these recommendations have on professional investors who are one of the primary users and consumers of financial statements. The report contains information mainly from the ICAEW report and the CFA institute report
The most important role of financial reports is to effectively communicate financial information to outsiders in a timely and credible manner (FASB, 1984). Earnings are vital in financial statements because earnings represent the company’s value. Investors and creditors always look to
Baruch Lev and Feng Gu authors of “The End of Accounting and The Path Forward for Investors and Managers” indicate that over the past 110 years, the structure and content of financial reports has not changed, and that the role that these reports play in influencing the decisions of investors has greatly diminished. Lev and Gu make a case that non-transaction events that are not captured by the financial reports such as those disclosed through 8-k filings with the Securities and Exchange Commission (“SEC”) have a greater impact on stock prices, and thus more useful to investors. In addition, they suggest that one of reasons for the decline in usefulness of financial reports stems from the increase of estimates that has made its way into these reports (Lev and Gu 2016).
The quality of earnings, reported by companies is simply the portion of income that comes from the operating functions of the business. The quality of earnings is one way that individuals can use the reported income to predict the company's future. Another way to put it is that the earnings quality is "The
The financial community in the United States has become increasingly concerned with the quality of reported company earnings.
IASB standard-setters are expecting to develop high quality, scrutable and enforceable world wide accounting standards that would require companies to provide high quality, transparent and comparable information for the users who may participate in the world’s capital markets. IASB has done greatly well. Take some standards as an instance, asymmetric timeliness make bad news and good news be involved timelier in the financial statements. The crucial factors of quality formerly be treated as relevance and reliability, however, there are less focuses on reliability recently by IASB and FASB. Ray Ball believed the reason of this situation is because a failure to differentiate reliability that is the result of managerial manipulation from reliability that is intrinsic in
A quality of earning assessment is a tool used by analyst to determine the correlation between accounting income and economic income. The techniques to analyze accounting income and economic income include: comparing accounting principles, reviewing changes in accounting principles, analyzing discretionary and warranty expenditures, understanding replacement cost of assets and managements and auditors opinion of the company. A quality of earnings assessment of PepsiCo is applied to the various techniques to analyze accounting income and economic income.
Ball, R / Shivakumar L. (2005): Earnings quality in UK private firms: comparative loss recognition timeliness, Journal of Accounting and Economics Vol. 39, 2005, pp. 83–128.
Nowadays, as our economy is facing possible everyday crises, managers undergo an increasing pressure in order to keep their company 's earnings stable. Shareholders and analysts expect companies to meet forecasted goals and not to deviate from these. Especially, reliable companies are to report positive results and shall not present any 'surprises '. Managers therefore often turn to their accounting departments for help, whose job it then is to improve the bottom line by changing the information shown in financial