Avery Corporation case have greatly focused on the earnings quality and interpretation of facts. Hence, I find the below article very relevant summarization of variables that influence directly or indirectly the quality of earnings. The author has evaluated below list of variables:
- Accounting standards: as discussed in previous blog entries on IFRS, the US GAAP leaves a lot of room for interpretation hence could affect the quality of earnings. It is suggested that strictness of the standards influences the quality of earnings.
- Firm characteristics: some research proves that there is strong correlation between earnings and shareholder composition as well as controlling shareholder.
- Board, auditing committee: number of board members and as well as the frequency of audit meetings and its participants may also affect the quality of earnings.
- Managerial characteristics: managers compensation plan as well as turnover the managerial positions could also affect the earnings.
- Auditing firms: loyalty to one auditing institution may also lead to more lenient interpretations hence misstated earnings.
It is important to quantify many different aspects while evaluating the quality of earning and would recommend below article for more insights.
Wu, D. (2009) What are affecting earnings quality: A summarization, Journal of Modern Accounting and Auditing, May 2009, Vol.5, No.5