Accounting manipulation and components of accruals

What is it about?

Academic models that try to detect whether firms have manipulated earnings in large samples are not very accurate. One way to improve the accuracy of the models is to look at the level of manipulation in components of accruals e.g. accounts receivable, payables, tax accruals, inventory, depreciation, etc... If all components are consistent in how they are used for manipulation, this would indicate that actual manipulation is more likely to have happened. If, on the other hand, the components are inconsistently used, this would indicate inaccuracies in measuring manipulation.

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Why is it important?

Investors and others want to be able to detect earnings manipulation by firms which indicates poor management and governance.