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The purpose of this paper is to introduce analyst estimates and option pricing-based variables in modeling material accounting misstatements.

The paper uses a logistic regression model to analyze a comprehensive sample of AAER and non-AAER firms listed in the USA.

By applying a cross-sectional, sequence of time-series logistic regression models, the authors find better identifiers of ex ante risk of fraud than prediction models based on an inspection of abnormal accruals. These identifiers include the managed earnings (ME) component of a firm and the change in a firm’s option contracts’ implied volatility (IV) prior to an earnings announcement.

The empirical findings contribute to an understanding of earnings manipulation (fraud) and should be of value to auditors and regulatory bodies interested in identifying financial statement fraud, particularly the Securities and Exchange Commission, which has been improving its accounting quality model (AQM or Robocop) fraud detection tool for many years. The results contribute substantially to enhancing the current accounting literature by introducing two non-accrual-based measures that significantly enhance the predictive power of an accrual-based accounting misstatement prediction model.

This paper radically departs from relying on the assumption that the clearest and easiest pathway to detect fraud reporting ex ante is through an examination of accruals. Instead, the authors use a richer source of information about the possibility of a firm’s misstatement of its financial accounting numbers, namely, analyst estimates of ex post earnings and the IV from exchange-traded option contracts.

The purpose of this paper is to examine whether mandatory adoption of International Financial Reporting Standards (IFRS) in the European Union reduced earnings manipulation, as proxied by the difference between a firm's reported earnings and ex post estimate of earnings by financial analysts.

Controlling for firm and institutional factors and drawing upon a sample of 15,034 firm‐year observations from 20 European countries, the research design entailed examining the change in the earnings manipulation proxy during pre‐ and post‐IFRS adoption periods.

The principal finding from this analysis was a decline in the magnitude of the proxy for earnings manipulation coincidental with IFRS adoption, which suggests that a uniform financial reporting regime may have contributed to exposing the use of temporary activities to manipulate earnings.

The results of this study make an important contribution to the extant literature on the outcomes of IFRS adoption, and should be of value to investors and standard setters, who want honest and comparable financial reporting but are opposed to regulatory intervention. Of equal significance is the innovative model introduced to proxy for earnings manipulation.

The business environment for the past quarter‐century has been characterized by increasing competition, decreasing product life cycles, and growth of industrial organizations in terms of both human and physical assets. Coupled with these challenges are increased societal pressures for greater corporate accountability. In order to survive and eventually achieve myriad diverse objectives, decisionmakers are forced to extend planning horizons, introducing even greater levels of uncertainty. Moreover, the typical decision‐maker is further removed from action points, increasing the communications problem and rendering decisive management more difficult.