Accruals-based Earnings Management: Concept, Origins, and Evolution

Abstract

Accruals-based earnings management is a critical and contentious topic in the field of accounting and finance. It involves the manipulation of earnings through accrual accounting methods. Despite its widespread recognition, there is a lack of consensus regarding its definition, origins, and evolution. This literature review consolidates existing knowledge on accruals-based earnings management. It seeks to clarify its concept, trace its historical origins, and understand its evolutionary path within accounting practices, emphasizing the impact of various factors on its application. Research methods - the review analyzes secondary data from 23 prominent accounting and finance journals. 41 articles and related books have been carefully selected, focusing specifically on accrual-based earnings management. This process thoroughly reviewed theoretical foundations, empirical research, and various scientific perspectives. The review identifies a diverse range of definitions and applications of accruals-based earnings management. It highlights its emergence in the 1980s, influenced significantly by agency theory. Further, it categorizes the outcomes of earnings management and explores the factors influencing its practice, including managerial intentions, international financial reporting standards (IFRS), agency conflicts, contractual obligations, and free cash flows. The evolution of accruals-based earnings management is marked by increasing sophistication and varying perceptions of its ethical implications. This comprehensive review provides a nuanced understanding of accruals-based earnings management, revealing its complex nature and the factors shaping its practice. It offers valuable insights for researchers and practitioners, enhancing the understanding of this pivotal aspect of financial reporting and guiding future research in the field.