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

 
2007 Annual International CHRIE Conference & Exposition 
52
Among the existing literatures, Dechow et al. (1995) and Teoh et al. (1998) developed two distinctive 
accrual approaches to measure earning measurement: hereafter this paper will refer them as Dechow and Teoh. The 
modified Jones model developed by Dechow is the most widely used method to detect earnings management. This 
method has been employed in numerous articles such as influence on stock markets (Kasznick, 1999); measuring 
accruals quality (Francis et al., 2005); accruals signaling private information (Louis, 2005); mispricing abnormal 
accruals (Xie, 2001) and more. This model was originally developed by Jennifer Jones (1991) in her research article 
to detect earnings management during an import relief investigation. Jones’ original model assumes that 
management has no control over revenues regardless of revenue type; account receivables, cash, and credit sales.
However, Dechow further developed this model by adding a new variable and replaces the existing revenue variable 
with the new variable (
Δ
Revenue – 
Δ
Account Receivable), implying that cash revenue is not under the discretion 
of management (Dechow et al. 1995). More importantly, the critical feature in the modified Jones Model employs 
Total Accrual Approach and makes an assumption that management has discretion over long-term assets such 
depreciation methods, and deferred taxes, etc. 
Conversely, Teoh’s model does not make such claims. His model builds on the same principle that cash is 
not under the discretion of management. However, Teoh states that management has discretion over short-term 
assets and liabilities from day-to-day operation such as advanced recognition of revenues from credit sales, delayed 
recognition of expenses, and low provisions for bad debts (Teoh, et al 1998). Thus, Teoh employs Current Accrual 
approach to measure firm related earnings management by replacing Total Accrual in the modified Jones model and 
delete the Property, Plant and Equipment variable. Other researchers like Francis (2006) and Guenther (1994) also 
contend that management has greater discretion over current accruals. Their statement is valid especially for the 
hospitality industry as the industry is notorious for high-employee-turnover rate and it is safe to assume that 
management does not stay long enough to manipulate long-term accruals such as depreciation methods or deferred 
tax accounts.