Detecting Earnings Management — Evidence from Rounding - up in Reported EPS

This paper evaluates a comprehensive list of metrics proposed for detecting earnings management in a setting where managers manipulate earnings to round up reported EPS. I find that deferred tax expense is able to detect earnings management in the rounding-up setting while discretionary accruals models are not. Further analysis provides evidence that firms manipulate bad debt expense for the purpose of rounding-up reported EPS. The superior performance of deferred tax expense can be explained by deferred tax expense being better able to capture earnings manipulation through bad debt expense than discretionary accruals are. This finding highlights the importance of examining specific accruals, as advocated in Healy and Wahlen (1999).