Enron. Lehman Brothers. More recently, General Electric and Supermicro. During the past quarter century, a variety of high-profile companies have been caught cooking their books.
But they’re often not caught before they’ve cost investors billions of dollars. That’s why analysts have long tried to sniff out businesses that may be using questionable or flat-out illegal accounting tricks to hide poor performance.
New research from Urooj Khan, accounting professor and the Deloitte & Touche Centennial Faculty Fellow at Texas McCombs, proposes a new and more effective way to gauge companies’ “earnings quality.”
In analyses of corporate financial statements, Khan’s measure, known as earnings quality score (EQSCORE), proved superior to the best existing models at identifying companies engaged in possible accounting misconduct.