Earnings Quality

Abstract

This monograph provides a thorough review of earnings quality issues and analysis. Its primary objectives are to help gain a deep understanding of earnings quality and facilitate the development of comprehensive, granular, and contextual earnings quality indicators and analyses. While there are several alternative definitions of earnings quality, the monograph focuses on the earnings sustainability or persistence view, which emphasizes valuation implications. With a working definition of earnings quality, the study then analyzes comprehensive and line-item financial statement indicators of earnings quality, and it relates the indicators to specific earnings quality issues. The monograph also describes nonfinancial indicators of earnings quality, including proxies for incentives and ability to manipulate earnings as well as transactions, events and circumstances that inform on earnings sustainability.