We had a great Round Table with Paul Zarowin yesterday, where we talked about the large and ever-growing literature on earnings management.  While much has been done in this area, it was clear from yesterday’s discussion that there remain many fruitful areas for future research.  If you didn’t get the chance to join us, I recommend watching the archive, which is available here.

One area in particular that needs improvement is our ability to model what pre-managed earnings would look like, so that we can better detect when reported earnings have been managed using one technique or another.  On this topic, one thing to keep an eye on is the FASB/IASB joint project on financial statement presentation because the Boards and staff are currently considering a proposal to require companies to provide key account roll-forwards each period.  If this proposal were to go through, it would not only provide users with much more transparency into what causes account balances to change from period to period, but would also provide academics with much more granular information, which could be used to fit better models of “normal” account activity.

One of the questions that came up toward the end of yesterday’s session was which papers are “must reads” in the earnings management literature.  Here are a few at the top of Paul Zarowin’s list:

  • Burgstahler, D. and I. Dichev 1997. Earnings management to Avoid Earnings Decreases and Losses, Journal of Accounting and Economics, 24, 99-126.
  • Graham, J. R., C. R. Harvey, and S. Rajgopal 2005. The Economic Implications of Corporate Financial Reporting. Journal of Accounting and Economics 40: 3-73.
  • Healy, Paul and James Wahlen 1999. A Review of the Earnings Management Literature and its Implications for Standard Setting, Accounting Horizons, 17, 365-383.
  • Schipper, K. 1989. Commentary: Earnings Management. Accounting Horizons, 91-102.

I’d certainly be interested in hearing what other people would add to this list.  Feel free to add your thoughts in a comment below, or you can email me your suggestions for the list.

Disclaimer: The views expressed here are my own and do not represent positions of the Financial Accounting Standards Board. Positions of the FASB are arrived at only after extensive due process and deliberations.