Innate and Discretionary Accrual Quality and Corporate Governance

Pamela Kent
Bond University
Australia

James Routledge
Bond University
Australia

Jenny Stewart
Griffith University
Australia

Abstract:
The empirical analysis presented in this paper provides further insight into the important issue of the association between corporate governance structures and the quality of reported company earnings. The analysis uses the measure of accrual quality developed by Dechow and Dichev (2002) which provides a direct measure of the quality of current accruals. We derive measures of the innate and discretionary components of accrual quality following Francis et al. (2005), and subsequently include these measures in regressions against corporate governance characteristics. The results show that sound governance structures have a positive association between the innate and discretionary components of accrual quality. Interestingly, we find the relation between sound governance structures and accrual quality is stronger for innate than discretionary accruals. This suggests that sound governance is more important in reducing environmental uncertainty and associated unintentional accrual estimation errors than in constraining discretionary earnings management.