When audit quality manage-is low, we posit that auditors do not constrain these extreme choices and that in some cases,auditors may even aid management in ‘‘pushing the boundaries’’ of G
Trang 1University of Illinois at Urbana-Champaign
Thomas C Omer
University of Illinois at Chicago
ABSTRACT: In this study, we document evidence on the relation between auditor
ten-ure and earnings quality using the dispersion and sign of both absolute Jones-model abnormal accruals and absolute current accruals as proxies for earnings quality Our study is motivated by calls for ‘‘mandatory auditor rotation,’’ which are based on con- cerns that longer auditor tenure reduces earnings quality Multivariate results, control- ling for firm age, size, industry growth, cash flows, auditor type (Big N versus non-Big
N), industry, and year, generally suggest higher earnings quality with longer auditor
tenure We interpret our results as suggesting that, in the current environment, longer auditor tenure, on average, results in auditors placing greater constraints on extreme management decisions in the reporting of financial performance.
Keywords: auditor tenure; earnings quality; audit quality; mandatory rotation.
Data Availability: All data used in this study is publicly available.
I INTRODUCTION
The issue of earnings quality and the quality of financial statements in general has
been the focus of recent Congressional, regulatory, and financial statement user cussions Recent events have focused the public’s eye on earnings quality and onaudit quality in general Numerous legislative proposals at federal and state levels wouldplace limits on the maximum length of a given auditor-client relationship The proposedlimits are based on the notion that extended auditor tenure results in auditor complacencyabout and possibly complicity in the decisions that management makes regarding the pre-sentation of financial results While the Sarbanes-Oxley Act of 2002 does not impose man-datory rotation on audit firms, it mandates a study of mandatory rotation by the ComptrollerGeneral of the United States to be completed within one year of the passage of the Act
dis-We thank Mark Bradshaw, Mark Peecher, Marjorie Shelley, and two anonymous reviewers for their insightful comments All errors and omissions are our own.
Editor’s note: This paper was accepted by Terry Shevlin, Senior Editor.
Submitted June 2002 Accepted February 2003
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The Accounting Review, July 2003
In this study, we document the relation between earnings quality (using absolute,signed, and raw [unsigned] accruals measures as proxies for earnings quality) and auditortenure We assert that earnings quality can be used to draw inferences about audit quality
We do not purport to comment on audit quality in the traditional sense—compliance withGenerally Accepted Auditing Standards (GAAS) Rather, we claim that when audit quality
is high, auditors constrain the extreme (and presumably self-serving) choices that ment would like to make in presenting the financial position of the firm When audit quality
manage-is low, we posit that auditors do not constrain these extreme choices and that in some cases,auditors may even aid management in ‘‘pushing the boundaries’’ of Generally AcceptedAccounting Principles (GAAP).1
Proponents of mandatory rotation express the belief that poor-quality earnings are sociated with extended auditor tenure Poor-quality earnings are problematic because theycan mislead investors, resulting in misallocated resources In its defense, the accountingprofession has argued that mandatory rotation increases audit start-up costs and increasesthe risk of audit failure because the incoming auditor places increased reliance on theclient’s estimates and representations in the initial years of an engagement Over time,auditors can gain firm-specific expertise, which helps them to understand the business andallows them to rely less on management estimates.2 Managers of firms being audited arealso opposed to mandatory rotation because changing auditors is costly These managersbelieve that auditors better understand their particular business with experience and man-agers have concerns about whether a new auditor will have the requisite industry expertiseand / or will be able to put forth the additional effort required to audit a new client (Dunham2002)
as-In this paper, we provide evidence on the claim made by proponents of mandatoryauditor rotation that the current voluntary rotation system is flawed Because the push formandatory rotation stems from the belief that extended auditor tenure impairs auditor in-dependence, we assert that understanding the relation between auditor tenure and earningsquality is central to the debate That is, the veracity of claims made by proponents aboutthe current system should be central to decisions made by regulators, and of interest toauditors and financial statement users To our knowledge, this is the first broad cross-sectional study to explicitly consider the relation between auditor tenure and earnings qual-ity as proxied for by measures of accounting accruals We assume that producing higher-quality earnings is the goal of recent legislative proposals and claim that the extent to whichauditor tenure either enhances or inhibits earnings quality should be addressed before leg-islative or regulatory changes impose limits on auditor tenure Borrowing extensively fromprevious research that uses accounting accruals as a proxy for earnings quality, we test for
an association between auditor tenure and earnings quality for those auditor-client nations where the auditor-client relationship lasts for at least five years We do this byexamining the relation between absolute, signed, and raw values of both Discretionary andCurrent Accruals and auditor tenure after controlling for other factors expected to affectthe distribution of accruals
combi-Although we cannot comment on whether mandatory auditor rotation would improveearnings quality, we do provide evidence inconsistent with the claim that earnings quality
1 For a more thorough discussion of audit quality and auditor independence, see Levitt (2000).
2 For example, while Chairman of the SEC, Wallman wrote that ‘‘[p]eriodically rotating the audit firms of a public company seems contrary to the notion of learning as much as possible about an audit client It also would appear to be remarkably inefficient.’’ (See Wallman, 1996, 93.)
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deteriorates with extended auditor tenure under the current voluntary rotation system Aftercontrolling for firm age, size, industry growth, cash flows, auditor type (Big N versus non-Big N), industry, and year, we find that the magnitude of both Discretionary and CurrentAccruals decline with longer auditor tenure Further, we find some evidence that longer
auditor tenure is associated with less extreme income-increasing accruals.3 This suggeststhat as the relationship lengthens, auditors limit management’s ability to use accruals toincrease current period earnings We also find evidence that longer auditor tenure is asso-
ciated with less extreme income-decreasing accruals This suggests that as the relationship
lengthens, auditors limit management’s ability to create reserves to manage future earnings
We find this result particularly interesting because income-decreasing earnings managementhas received a great deal of attention from regulators and the popular press as of late.4
The remainder of the paper is organized as follows In Section II, we summarize thearguments supporting and opposing mandatory auditor rotation and develop our hypotheses
We discuss our data and empirical results in Section III, and in Section IV we present ourconclusions and the implications of our study
II HYPOTHESIS DEVELOPMENT Arguments Supporting Mandatory Auditor Rotation
Whether auditor rotation should be made mandatory is an issue that has been debatedfor more than 40 years in the U.S Proponents of mandatory auditor rotation are generallyconcerned that auditor independence, and thus audit quality, will decrease with increasedauditor tenure Mautz and Sharaf (1961) suggest that extended auditor-client relationshipscould have a detrimental affect on auditor independence because an auditor’s objectivityabout a client is reduced with the passage of time Further, the Metcalf Committee statesthat ‘‘mandatory auditor rotation is a way to bolster auditor independence’’ (U.S Senate
1976, 21) More recently, regulators suggest a link between auditor tenure and reductions
in earnings quality, and allude to mandatory auditor rotation as a possible solution (U.S.Senate 1977; AICPA 1978; Berton 1991; SEC 1994) It has been suggested that decreasedauditor independence could lead to auditors’ support for more aggressive accounting choicesthat ‘‘push the boundaries’’ of GAAP and could ultimately result in a failure to detectmaterial fraud and / or misstatements Mandatory rotation proponents argue that limitingauditor tenure reduces concerns about deteriorating independence and audit quality.5 Inresponse to the recent Enron / Anderson audit failure, several bills containing provisionslimiting auditor tenure and mandating auditor rotation were proposed in the House andSenate as part of an effort to improve financial reporting and protect investors.6
3 Specifically, we find a significantly negative association between tenure and Positive Current Accruals in all specifications We also find a significantly negative association between tenure and Positive Discretionary Ac- cruals when all sample firm-years are included in our analyses, but when we omit firms with extremely positive and negative return on assets, the sign on tenure remains negative but the result is not significant.
4 See, for example, Levitt (1998).
5 Research by Deis and Giroux (1992) suggests a negative relation between auditor tenure and audit quality, consistent with concerns about the current system raised by proponents of mandatory auditor rotation However, their results may have little bearing on the current debate because their sample includes only small CPA firms and the audit clients represent quasi-governmental entities in the public sector.
6 See, for example, the Integrity in Auditing Act of 2002 (which suggests that auditors should not be considered independent if they have audited a firm for more than seven consecutive years), the Comprehensive Investor Protection Act of 2002 (which suggests that non-independence is a problem when the auditor has consecutively audited a firm’s financial statements for more than four years), and the Truth and Accountability in Accounting Act of 2002 (which states that an auditor should not be considered independent if it has audited a firm’s financial statements for more than seven consecutive years).
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Arguments Opposing Mandatory Rotation
Opponents of mandatory rotation suggest that along with higher audit costs, an creased likelihood of audit failures would result from mandated rotation New auditors, theyargue, lack sufficient knowledge regarding firm-specific risks and, as a consequence, auditfailures would likely increase This argument is consistent with research indicating that agreater proportion of audit failures occur on newly acquired clients (Berton 1991; Pettyand Cuganesan 1996) and that auditors’ litigation risk is greater in the early years of anengagement (Palmrose 1986b, 1991) Further evidence on auditor tenure and audit quality
in-is provided by the AICPA’s Quality Control Inquiry Committee of the SEC Practice tion The Committee analyzed 406 cases of alleged audit failure between 1979 and 1991
Sec-and concluded that allegations of audit failure occur almost three times as often when an
audit firm is performing its first or second audit of a given client (AICPA 1992) nally, the accounting profession argues that uncertainty regarding characteristics of theclient increases the potential for audit failures early in the auditor-client relationship(PricewaterhouseCoopers 2002).7
Fi-Accounting Accruals and Audit Quality
Absent from public discussion and prior research is a cogent picture of the ter)temporal relation between audit quality and auditor tenure The results of prior studies,while informative about extreme events (for example, SEC violations and qualified opin-ions), do not address audit quality for a broad cross-section of firms However, the relationbetween auditor tenure and audit quality is of interest in a broader context By linkingearnings quality and audit quality, we attempt to address this relation more generally While
(in-we acknowledge that studying the association bet(in-ween auditor tenure and audit quality inthe case of extreme audit failures is important, we suggest that a broader analysis of thisrelation should be informative to the mandatory rotation debate
To address the relation between auditor tenure and audit quality, we must first provide
a plausible definition of audit quality We borrow from an extensive prior literature to arguethat accounting accruals measures are a plausible descriptor of audit quality Numerousstudies have examined the association between various measures of accruals and proxiesfor audit quality These proxies include auditor litigation, qualified audit opinions, auditfailures, and auditor conservatism Results suggest that higher accruals levels are positivelyassociated with eventual auditor litigation (Heninger 2001), the issuance of qualified auditopinions (Bartov et al 2000), audit failures (Geiger and Raghunandan 2002), and auditorchanges (DeFond and Subramanyam 1998), while lower accruals levels are associated withgreater auditor conservatism, which has been interpreted as suggestive of higher-qualityaudits (Becker et al 1998; Francis et al 1999; Francis and Krishnan 1999) Based on these
7 Prior research suggests two reasons why auditors are likely to be less aggressive in their oversight of management early in an auditor’s tenure First, Geiger and Raghunandan (2002) suggest that one reason new auditors are less aggressive in their oversight is because they are attempting to recoup losses from the competitive practice
of low-balling However, while the practice of low-balling has been documented by Simon and Francis (1988), Ettredge and Greenberg (1990), and Deis and Giroux (1996), the literature suggests that low-balling and the recouping of losses does not impair auditor independence (DeAngelo 1981, 113; Lee and Gu 1998, 534) Thus,
if auditor independence is not impaired, auditor oversight of managements’ decisions should not be affected regardless of tenure Second, Geiger and Raghunandan (2002) also suggest that new auditors are likely to be less aggressive because they lack knowledge of client-specific risks Although they find that auditors are less likely
to issue going concern opinions for new clients, this does not provide convincing evidence on either the relation between low-balling and audit quality or the lack of client-specific knowledge That is, their result can be interpreted that the auditors failed to issue going concern opinions to increase the likelihood that they would
recoup some or all of the fees lost in the initial engagement period or that new auditors were unaware of the
client-specific risks and this lack of knowledge lead to the issuance of nonqualified opinions.
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findings, we posit that high-quality audits mitigate more extreme management reportingdecisions, and suggest that accruals can be used to identify these extreme reportingdecisions
Accruals measures have also been used in numerous accounting studies that considerthe relation between earnings management and accruals behavior, and earnings quality andaccruals behavior Early studies used the change in Total Accruals as a measure of man-agement discretion (e.g., Healy 1985; DeAngelo 1986), while later studies adopted andmodified the ‘‘Jones Model’’ (Jones 1991).8 Thus, abnormal discretionary accruals (esti-mated using variations of the Jones Model) became the accepted proxy for extreme man-agerial discretion Various accruals measures have also been used to study earnings quality.These studies are important to the audit quality issue because they generally find thatinformation is contained in specific accruals and / or that earnings quality declines withextreme accruals (e.g., Sloan 1996; Thomas and Zhang 2001; Xie 2001; Dechow andDichev 2002; Richardson et al 2002) Both the literatures on earnings management andearnings quality provide evidence that suggests that extreme accruals are less desirable,consistent with the audit quality literature cited above Thus, the extent to which accrualsbehavior is associated with auditor tenure under the current voluntary rotation system isinformative to parties currently debating mandatory rotation
We follow prior literature and perform analyses of those accruals measures generallyconsidered to be most representative of managements’ discretion in the financial reportingprocess—Discretionary Accruals and Current Accruals As in prior work, we not only studythe raw and absolute values of these measures, but we also posit that studying the associ-
ation between auditor tenure and signed accruals is important because auditors could
con-strain income-increasing accruals to a greater or lesser extent than income-decreasing cruals, and auditor tenure could have differential effects on this constraint.9 By usingmultiple measures, we better test the relation between auditor tenure and audit quality
ac-We formulate the following alternative hypotheses regarding the relation between ditor tenure and accounting accruals:
au-H rotation proponent : Audit quality (as measured by accounting accruals) is decreasing in
9 For example, the perception that litigation is more likely to occur when income is overstated might lead auditors
to constrain income-increasing accruals more severely than income-decreasing accruals even if auditors become less independent of their clients as the relationship lengthens Tests on the signed accruals rather than on their absolute values allow us to examine this possibility.
10 In related work, Davis et al (2002) provides results suggesting that discretionary accruals increase with auditor tenure However, differences in design (noted below) make it difficult to compare this study with ours First,
we examine the absolute value of two accruals measures and separately examine the positive and negative components of these measures Second, we do not require that firms survive throughout our entire sample period, thus eliminating the survivorship bias in Davis et al (2002) Third, we delete observations that limit our ability
to generalize our findings These include: (1) very young firms, so that abnormal accruals behavior associated
(continued on next page)
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III DATA AND EMPIRICAL RESULTS Data
Our initial sample consists of all firm-years from 1988 to 2000 inclusive with sufficientdata on the 2001 Compustat annual industrial and research files to estimate accruals Inaddition, we require at least the six years of prior data to ensure that any abnormal accrualsbehavior associated with start-up firms (Teoh et al 1998a, 1998b) is not attributed to shortauditor tenure Because Collins and Hribar (2002) show that estimating accruals is prob-lematic when firms undergo mergers and acquisitions, we also omit these observations.11
Finally, we limit our analyses to years beginning in 1988 because cash flow from operationswas not available before that date.12
We calculate auditor tenure as the number of years that the firm has retained the givenauditor, and code auditor changes attributable to audit firm mergers as a continuation ofthe prior auditor We determine which observations are in the top or bottom 0.5 percent ofthe distribution of cash flow from operations, Current Accruals or Jones Model residualsannually and delete them to remove outliers Note that our research question relates to therelation between the accruals (for a given firm) and auditor tenure To guard against thepossibility that observations where firms switch auditors early in the relationship differsystematically from observations where firms retain the auditor for a number of years, weeliminate all firm-year observations where the auditor-client relationship did not last at leastfive years That is, when the auditor-client relationship lasts at least five years, we retainall available observations, and when the auditor-client relationship lasts for less than fiveyears, we eliminate all of these auditor-client observations In this way, the early and lateryears represent the same auditor-client combinations, thus preserving comparability Elim-inating the quick turnover group reduces the sample size to 42,302 firm-years
In our analyses, we use two measures of accruals:
Current Accruals⫽ ((⌬CA⫺ ⌬Cash) ⫺ (⌬CL⫺ ⌬STD))
and
Discretionary Accruals⫽ Accruals ⫺ 0 ⫹ 1 ⌬Revenue⫹ 2PPE
(Jones Model residuals)13
where:
⌬CA⫽ change in current assets (Compustat annual data item 4);
⌬Cash ⫽ change in cash and cash equivalents (Compustat annual date item 1);
Footnote 10, continued
with start-up firms (Teoh et al 1998a, 1998b) is not attributed to short auditor tenure; (2) firms undergoing mergers and acquisitions, so that the difficulties in reliably estimating accruals for these firms (Collins and Hribar 2002) do not influence our findings; and (3) observations where firms change auditors in the first five years of an audit engagement, because their inclusion does not allow us to directly address the question of what happens to accruals with lengthy auditor tenure.
11 To identify firms that undergo mergers and acquisitions, we follow Collins and Hribar (2002) and use the footnote codes appearing in Compustat.
12 The number of new auditor-client combinations each year ranges between 306 (in 1994) and 527 (in 2000) The number of new auditor-client combinations for Big N auditors is 3,590 versus 1,561 for non-Big N auditors.
13 We estimate the residuals and the coefficients contemporaneously That is, for each year, we estimate the model within two-digit SIC industries, and use the residuals from this regression as our estimate of discretionary accruals.
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⌬CL⫽ change in current liabilities (Compustat annual data item 5);
⌬STD⫽ change in short-term notes and current portion of long-term debt (Compustat
annual data item 34);
i ⫽ coefficient estimates from an OLS regression by industry-year, where an dustry is defined by its two-digit SIC code; to reduce sampling error and to
in-be consistent with prior literature, we eliminate industry-years with fewer thaneight firms;
Accruals ⫽ operating income after depreciation (Compustat annual data item 178) – cash
flow from operations (Compustat annual data item 108);
⌬Revenue ⫽ change in net sales revenue (Compustat annual data item 12); and
PPE ⫽ property, plant, and equipment—net (Compustat annual data item 8)
We scale all variables by average total assets
Empirical Results
Table 1, Panel A provides descriptive statistics for all firms in our sample where theauditor-client relationship lasts at least five years, while Panel B provides descriptivestatistics for the quick-turnover firms (where the auditor-client relationship lasts for lessthan five years) Within each panel we present descriptive statistics during three stages ofthe auditor-client relationship: 1 to 2 years; 3 to 4 years; and more than 4 years (when anauditor-client relationship lasts for at least 5 years).14 We selected these stages (or group-ings) for two reasons First, drafts of the Congressional bills cited earlier provided a range
of suggested mandatory rotation periods, and groups of 3 to 5 years and more than fiveyears are representative of the suggested periods Second, the argument for mandatoryauditor rotation hinges, in part, on the potential for reducing extreme management reportingdecisions with unbiased oversight by auditors in the initial years of an auditor-client rela-tionship, while the argument against mandatory auditor rotation hinges, in part, on theuncertainty that occurs during the initial years Our grouping of 1 to 2 years is representative
of this initial period
The quick-turnover firms are significantly different from firms where the auditor-clientrelationship lasts for at least five years (i.e., the sample firms) For example, for the subset
of firms that are in their first or second year of the audit engagement, the quick-turnoverfirms have significantly smaller average ROA and Cash Flow, and are older Results on sizeproxies are mixed Table 1 also reveals that the dispersion of our two accruals measures issignificantly greater (in the first two years of the audit engagement) for the quick-turnoverfirms than for the sample firms For these reasons, and because including quick-turnover firms does not allow us to adequately address the possible consequences of ex-tended auditor tenure, we eliminate the quick-turnover firms in all subsequent analyses
Univariate Results
In this section, we present univariate results concerning auditor tenure and our accrualsmeasures Specifically, in Figure 1 we graph the 90th percentile, mean, median, and 10thpercentile of our two accruals measures, Discretionary Accruals and Current Accruals, by
14 Note that observations relating to a given auditor-client combination will appear in Panel A if and only if that combination lasted for at least five years However, if the auditor-client combination lasted for ten years, the first two years will be included in the Group 1 observations, the next two years will be included in the Group
2 observations, and the final six years will be included in the Group 3 observations Observations relating to a given auditor-client combination will appear in Panel B if and only if that combination lasted for less that five years The groupings can be interpreted as in Panel A.
Trang 8Group
ROA Mean (Median) [n]
Cash Flow Mean (Median) [n]
MVE Mean (Median) [n]
Assets Mean (Median) [n]
Tenure Mean (Median) [n]
Age Mean (Median) [n]
Absolute Discretionary Accruals Mean (Median) [n]
Absolute Current Accruals Mean (Median) [n]
Panel A: Omitting Observations Where the Auditor-Client Relationship Lasts for Less than Five Years
Group 1
1 or 2
years
⫺ 0.0324 (0.0237) [2,637]
0.0394 (0.0635) [2,637]
781.11 (32.868) [2,174]
1,153.58 (41.201) [2,637]
1.6011 (2) [2,637]
10.7144 (10) [2,637]
0.0918 (0.0553) [2,637]
0.1582 (0.0702) [2,637] Group 2
3 or 4
years
⫺ 0.0407 (0.0249) [3,730]
0.0293 (0.0631) [3,730]
991.15 (41.135) [3,115]
1,463.79 (49.897) [3,730]
3.5357 (4) [3,730]
11.4434 (11) [3,730]
0.0917 (0.0524) [3,730]
0.1565 (0.0677) [3,730] Group 3
⬎ 4 years
⫺ 0.0193 (0.0316) [35,935]
0.0477 (0.0723) [35,935]
1,788.15 (93.283) [31,124]
2,329.66 (129.472) [35,935]
10.4634 (10) [35,935]
12.1084 (11) [35,935]
0.0812 (0.0484) [35,935]
0.1313 (0.0592) [35,935]
Panel B: Observations Where the Auditor-Client Relationship Lasts for Less than Five Years
Group 1
1 or 2
years
⫺ 0.0939 (0.0077) [6,844]
0.0017 (0.0457) [6,844]
1,024.55 (29.176) [5,851]
1,721.13 (46.152) [6,844]
1.3494 (1) [6,844]
11.4566 (10) [6,844]
0.1091 (0.0622) [6,844]
0.1763 (0.0793) [6,844] Group 2
3 or 4
years
⫺ 0.1048 (0.0043) [1,869]
⫺ 0.0080 (0.0388) [1,869]
827.15 (22.586) [1,594]
1,246.54 (33.953) [1,869]
3.3087 (3) [1,869]
11.6249 (11) [1,869]
0.1163 (0.0723) [1,869]
0.1992 (0.0817) [1,869]
(continued on next page)
Trang 9Cash Flow Mean (Median) [n]
MVE Mean (Median) [n]
Assets Mean (Median) [n]
Tenure Mean (Median) [n]
Age Mean (Median) [n]
Absolute Discretionary Accruals Mean (Median) [n]
Absolute Current Accruals Mean (Median) [n]
Panel C: Tests of Differences between Observations Where the Auditor-Client Relationship Lasts at Least Five Years and Observations
Where the Auditor-Client Relationship Lasts for Less than Five Years
t-statistics for Tests of Differences in Means
(Z-statistics for Tests of Differences in Medians)
0.83 (4.78***)
* , **, *** Indicates significant at 10, 05, and 01, respectively, using a two-tailed test.
Observations relating to a given client combination will appear in Panel A if and only if that combination lasted for at least five years However, if the client combination lasted ten years, the first two years will be included in the Group 1 observations, the next two years will be included in Group 2 observations, and the final six years will be included in Group 3 observations Observations relating to a given auditor-client combination will appear in Panel B if and only if that combination lasted for less that five years The groupings can be interpreted as in Panel A.
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FIGURE 1 Accruals by Deciles of Tenure
Panel A: Current Accruals by Deciles of Tenure
10 percentile
Omitting observations where the auditor-client relationship lasts for less than five years.
Current Accruals ⫽ ((⌬CA ⫺ ⌬Cash) ⫺ (⌬CL ⫺ ⌬STD))
where:
⌬CA ⫽ change in current assets (Compustat annual data item 4);
⌬Cash ⫽ change in cash and cash equivalents (Compustat annual date item 1);
⌬CL ⫽ change in current liabilities (Compustat annual data item 5); and
⌬STD ⫽ change in short-term notes and current portion of long-term debt (Compustat annual data item 34) Discretionary Accruals ⫽ Accruals ⫺ 0 ⫹  1 ⌬Revenue ⫹ 2PPE
where:
Accruals ⫽ operating income after depreciation (Compustat annual data item 178) – cash flow from operations
(Compustat annual data item 108);
i⫽ coefficient estimates from an OLS regression by industry-year, where an industry is defined by its two-digit SIC code;
⌬Revenue ⫽ change in net sales revenue (Compustat annual data item 12); and
PPE ⫽ property, plant, and equipment—net (Compustat annual data item 8).
All variables are scaled by average total assets.