The Accruals Process

Abstract

In the Introduction to Part 4, we separated accruals into three components: discretionary accruals, non-discretionary accruals, and reversals arising from transactions that took place in previous periods. The unobservability of the composition of accruals poses a challenge to the earnings management research. Elgers, Pfeiffer, and Porter (2003, p. 406), state, “A fundamental issue in assessing earnings management is the unobservability of the managed and un-managed components of reported earnings.”