Microsoft Word 2007 ichrie conference Proceedings Final-Final 06-06-07. doc

Key Words:
The Casino industry, earnings management, accruals, recession, earnings 
INTRODUCTION 
The importance of transparency in financial statements cannot be overstated as investors and creditors 
make financial decisions based upon accounting numbers reported by management and certified by the auditors. In 
the same line, many managers believe that increasing earnings per share is one of the most important objectives 
suggesting that managers manage earnings to window dress their financial statement (Burgsthler and Dichev 1997). 
Therefore, a stream of research examines if and how earnings are managed (see Healy and Wahlen 1999 for a 
comprehensive review). If the idea of earnings management plays a crucial role in the assessment of firm 
performance by investors as well as creditors, then it is important to identify whether the economic conditions and 
income sources unique to each industry interact to create differences in how earnings are managed. Most of the 
research on earnings manipulation focuses on accruals to test whether earnings are managed. However, the level of 
accruals is not constant across industries. This study posits that because there are differences in the levels of accruals 
across industries, therefore, there will be cross-sectional differences in the ability of the detection models to detect 
earnings manipulation. Thus, this research will examine the gaming industry as a setting to identify a better 
measurement tool of earnings management when the industry generates a majority of income in the form of cash and 
cash equivalent, thus left with less of accruals to manage earnings. This paper will also examine whether the 
industry manages earnings differently based on industry specific economic conditions; recession vs. non-recession 
period.
Most of earnings-management research papers have adopted an accrual approach to assess the degree of 
firm related earnings management and use accruals to proxy for earnings management (Beneish 1998)
1
. The idea 
behind employing accruals is to dichotomize earnings into discretionary and nondiscretionary accruals. The non-
discretionary accruals is the portion represented as earnings that are beyond management’s control such as loan 
interest payments, employee payroll, and the likes. On the other hand, discretionary accruals are considered as an 
area where management exercises a great discretion to smooth earnings to provide more favorable financial 
outcomes.
However, the gaming industry generates much greater portion of cash revenue from gaming operation, 
leaving relatively less accruals to manage earnings. According to Laventhol and Horwath (1998), US lodging 
industry data indicate that typical gaming hotels record about 80% of their total revenue from gaming operation 
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Accounting accruals are resulted from timing differences from difference accounting choices (Watts and Zimmerman 1990).

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