Critical Comment on Studies on Measures of Earning Quality
The critical analysis of the studies employing the measures of earning quality calls for the presentation on the context of earnings quality. Reported earnings can be explained as the financial performance of the firm during the reporting period together with the accounting system, which converts the unobservable financial performance into evident earnings. The definition of reported earnings implicates that earnings and the choices regarding the significance of these earnings are a performance function and not entirely based on the measurement of financial performance.
An important observation is that significant progress in studying issues revolving around implementation does not imply that additional work is pointless. For instance, the research on abnormal accruals could progress toward the proper differentiation of the effect of the financial performance measurement on the earnings from the impact of the performance itself. The models used to measure abnormal accruals try to control the accruals linked to the performance of the firm, branding them as normal or innate accruals. In contrast, the variables for modeling normal accruals are measured through reported accruals, which is based on earning related to performance. In this sense, therefore, the “normal” accruals fail to measure observable performance.
Even so, studies that focus on whether the aggregate accruals are superior to the cash flows fail to separate the impact of the measurement system on the usefulness of decisions of the effects of the financial performance itself as cash flows are not a representative of performance. Accordingly, researchers would be required to go over the inspection of abnormal accruals resulting from the accrual models to gain insight into measurement instead of the effect of the implementation of the accounting system.