Publication Date

Spring 2012


The use of earnings management has been on the rise for the past two decades. Earnings management is when managers alter corporate financial reports by exercising their discretion over accounting and financial issues. The use of discretionary accruals is a popular form of earnings management because they are difficult for independent auditors to verify since they involve subjective managerial estimates. Empirical models have been developed to measure the discretionary component of accruals.

Since there are empirical models that can measure discretionary accruals, the next step is to determine the incentives for the use of discretionary accruals. Studies of possible incentives include contractual and regulatory incentives among others. This study examines the incentives of firms to use discretionary accruals after they have received fraud-based legal rulings from a court or enforcement authority.