Changes in Accounting Estimates: A Double-Edged Sword?

• In Event: Financial Reporting Quality

Abstract

In light of the concerns about inherent measurement uncertainty and subjectivity embedded in accounting estimates and the need for new auditing standard and enhanced disclosure on accounting estimates expressed by regulators and investors, this study provides detailed documentation of changes in accounting estimates (CAEs) disclosed in corporate filings with the SEC and examines the impact of CAEs on earnings and financial statement quality. We find that the timing of CAEs is systematically associated with meeting or beating consensus analyst forecasts. Additional tests show that such timing of CAEs yields a net benefit to firms. We also find that CAEs are associated with lower earnings persistence and higher likelihood of financial statement misstatements. These findings together provide strong evidence of the managers’ self-serving biases in their CAE decisions and support for the need for enhanced disclosure to help financial statement users assess the appropriateness of the CAE.

Authors

• Anne Albrecht, Texas Christian University

• Kyonghee Kim, University of Missouri-Columbia