The primary product of financial reporting is net income or earnings as a measure of performance. Earnings are the summary measure of firm performance produced under the accrual basis of accounting. The primary role of accruals is to overcome problems with measuring firm performance using realized cash flows, because cash flows have timing and matching problems that cause them to be a ‘noisy’ measure of firm performance when firms are in continuous operation. However, the use of accruals can also hampers the informativeness and the usefulness of the accounting process when managers engage in earnings management. This dissertation examines accrual accounting and earnings management. Specific attention is given to the role of growth on accrual accounting. Growth adjusts the accrual process, and failure to control for growth may induce an omitted correlelated variable bias in earnings management literature. Growth also seems to affect the quality of accruals.
Date of defense: 22 February 2008