Accounting conservatism or earnings management: A study of the allowance for doubtful accounts

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Abstract

This paper empirically examines the relationship between conservatism and earnings management in chemical and allied products manufacturers via an analysis of the allowance for doubtful accounts and bad debt expense. Data used in the study included total accounts receivable, the total allowance for uncollectible accounts, total assets, and other firm-level data from the COMPUSTAT database of North American firms for companies with the standardized industry code (SIC) of 28 which represents chemical and allied products manufacturers. Chemical and allied products manufacturers were deemed an ideal target for the study because the industry typically has large balances in accounts receivable and allowance for doubtful accounts. Bad debt expense and write-offs were also used; these were obtained from the firms’ forms 10K Schedule II filed with the Securities and Exchange Commission (SEC) during the study period from 2005-2017. Analysts reports were also used, as obtained from Bloomberg for each firm. Results from subsequent regression analyses indicate that firms utilized excessive conservatism within the allowance for doubtful accounts to manage earnings to achieve earnings goals throughout the study period.

Keywords: Accounting Conservatism, Earnings Management, Conditional Conservatism, Asymmetry, Manipulation, Allowance for Doubtful Accounts, Bad Debt Expense, Auditor

Authors’ individual contribution: Conceptualization – T.G.B.; Methodology – T.G.B. and R.H.; Formal Analysis – T.G.B. and R.H.; Writing – T.G.B. and M.A.M.; Investigation – T.G.B., M.A.M., and R.H.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

JEL Classification: M12, M41, M42

Received: 13.11.2020
Accepted: 02.04.2021
Published online: 05.04.2021

How to cite this paper: Bryan, T. G., McKnight, M. A., & Houmes, R. (2021). Accounting conservatism or earnings management: A study of the allowance for doubtful accounts. Corporate Ownership & Control, 18(3), 175-190. https://doi.org/10.22495/cocv18i3art14