Detecting earnings management based on the quality of total accruals

This study introduces a new approach to assess accounting aggressiveness by evaluating a firm's total accrual quality. This measure is more comprehensive than the current accruals-based approach provided by Dechow and Dichev (2002) as it examines the long lags between accruals and cash flow realisations. We show that firms with low quality of total accruals have greater volatilities in their cash flows, earnings and equity returns, which are usually present in firms with red flag activities such as frequent one-time charges, acquisitions, change in discretionary expenditures and change in special items. Furthermore, the study explores and provides benchmark for the degree of total accrual quality in various industries.