Literature Review : Discretionary And Models

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Literature Review of Discretionary Accrual Models Chenxi Lin 01/03/2015 Literature Review of Discretionary Accruals Models Audit quality is crucial for financial statements users and efficient capital markets. However, how to measure audit quality properly has been a controversial issue, because quality is not observable. With no uniform definition of audit quality, prior researchers developed various audit quality proxies. Earning quality is one of the most commonly used measure for audit quality. Client discretionary accruals, meet or beat earnings target, and likelihood of restatement are all under this category. Among those, discretionary accruals are the most widely used, because it is positively related to earnings management, which reflects audit quality. The purpose of this review is to summarize the most commonly used models to measure discretionary accruals by previous literature, and to help future studies to choose from these models when they are used as audit quality proxies. Among all the research papers, there are two main methods to calculate discretionary accruals: change dependent variables to accruals model (e.g., Jones Model, Modified Jones Model, and McNichols Model) and performance adjustment measure (Kothari, Leone, and Wasley, 2005). The most frequently cited model of discretionary accruals model is Jones (1991) Model. The estimation of the discretionary accruals was used as the measure of earnings management. Jones (1991) measured the total
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