The Strengths And Weaknesses Of Different Discretionary Accruals Models

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This paper shows the analysis of the strengths and weaknesses of different discretionary accruals models in identifying earnings manipulation. The first paragraph defines earnings management and discretionary accruals as well as non-discretionary accruals. The following paragraphs after that will explain the different models that exist and how they work as well as their strengths and weaknesses. And the final paragraph will show a summary of the key findings and possible recommendations.

Definition and related Aspects
Earnings management “ occurs when managers use judgment in financial reporting and in structuring transactions to alter financial reports to either mislead some stakeholders about underlying economic performance of the company or to influence contractual outcomes that depend on reported accounting numbers” (Healy and Wahlen).
In order to do manipulate those earnings they use different techniques e.g. “cookie jar reserve technique” or “big bath technique”. Accruals accounts are also being used to manipulate those earnings and they are usually found on the balance sheet and embody the non-cash based assets and liabilities. Those accruals are sometimes used as a proxy for earnings management in order to evaluate the quality of the firms’ earnings. By attempting to split the accruals into discretionary and non-discretionary ones one can get a more complex proxy for possible earnings management. Non-discretionary accruals reflect the conditions of a

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