Dichev – Managing earnings – 2012
Abstract:
We provide new insights into earnings quality from a survey of 169 CFOs of public companies and indepth
interviews of 12 CFOs and two standard setters. Our key findings include (i) high-quality earnings
are sustainable and are backed by actual cash flows; they also reflect consistent reporting choices over
time and avoid long-term estimates; (ii) about 50% of earnings quality is driven by non-discretionary
factors; (iii) about 20% of firms manage earnings to misrepresent economic performance, and for such
firms 10% of EPS is typically managed; (iv) CFOs believe that earnings manipulation is hard to unravel
from the outside but suggest a number of red flags to identify managed earnings; and (v) CFOs disagree
with the direction the FASB is headed on a number of issues including the sheer number of promulgated
rules, the top-down approach to rule-making, the de-emphasis of the matching principle, and the overemphasis
of fair value accounting. CFOs lament that a rules-based culture makes the audit function
centralized and mechanical, and stunts the development of audit professionals.
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