Modelling Receivables and Deferred Revenues to Detect Revenue Management

This study develops and calibrates a revenue accruals model. Changes in accounts receivable and deferred revenues are modeled using the respective income statement and cash flow numbers (i.e., revenues and cash flows from sales) that relate directly to the accruals' origination and reversal. Compared to existing models, the proposed specification explains more variation in the data and, in simulations with seeded revenue manipulation, exhibits greater detection power and less bias. Furthermore, the abnormal revenue estimates are positively associated with cases of revenue misstatements identified by the SEC. Results imply that researchers, auditors, and regulators interested in detecting earnings management should focus on modeling specific accruals. As a practical matter, for detecting revenue management, they should consider broadening their scope to examine not only accounts receivable but also current and long-term deferred revenues