The Changing Landscape of Accrual Accounting

A fundamental property of accrual accounting is to smooth temporary timing fluctuations in operating cash flows, indicating an inherent negative correlation between accruals and cash flows. We show that the overall correlation between accruals and cash flows has dramatically declined in magnitude over the past half century and has largely disappeared in more recent years. The adjusted R 2 from regressing (changes in) accruals on (changes in) cash flows drops from about 70% (90%) in the 1960s to near zero (under 20%) in more recent years. In exploring potential reasons for the observed attenuation, we find that increases in non-timing-related accrual recognition, as proxied by one-time and nonoperating items and the frequency of loss firmyears, explain the majority of the overall decline. On the other hand, temporal changes in the matching between revenues and expenses, and the growth of intangible-intensive industries play only a limited role in explaining the observed attenuation. Finally, the relative decline of the timing role of accruals ∗The University of North Carolina at Chapel Hill; †Yale University. Accepted by Douglas Skinner. We thank the editor, an anonymous referee, Ted Christensen, Ilia Dichev, Greg Miller, and workshop participants at Florida International University, Fordham University, Fudan University, Peking University, Tsinghua University, University of Chicago, University of Michigan, and the 2014 AAA Meeting for helpful suggestions and comments. We also acknowledge financial support from Yale University. An online appendix to this paper can be downloaded at http://research.chicagobooth.edu/ arc/journal-of-accounting-research/online-supplements.