The Quality of Accounting Earnings, Fundamentals and Why Matching Matters : A Statistical Perspective

Earnings quality is nearly always examined in a political context in the accounting literature, focusing on the motivations of managers to deceive the users of financial statements. The literature pays little or no attention to the accounting measurement procedures that generate accounting numbers and their impact on the accuracy with which earnings reflect the underlying economic fundamentals of firm activities. This paper focuses on the accuracy dimension of the quality of accounting earnings. It analyses the statistical effect of accounting procedures on earnings over time and shows the sense in which greater precision in the matching of inputs and outputs in economic activities leads to the greater accuracy or “quality” of earnings