The authors conducted a survey of nearly 400 chief financial officers on the definition and drivers of earnings quality, with an emphasis on the prevalence and detection of earnings misrepresentation. The respondents believe that the hallmarks of earnings quality are sustainability, absence of one-time items, and backing by actual cash flows. However, they also believe that in any given period, a remarkable 20% of companies intentionally distort earnings, even while adhering to GAAP. The magnitude of the misrepresentation is large: 10% of reported earnings.
About the Author(s)
Campbell R. Harvey is Professor of Finance at the Fuqua School of Business, Duke University, and a Research Associate of the National Bureau of Economic Research in Cambridge, Massachusetts. He is President of the American Finance Association.