An Overview on the Most Significant Determinants of Earnings Quality

Accounting earnings is one of the most important information contained in financial statements that many factors affect its quality. The quality of reported earnings is very essential in optimal allocation of resources to capital markets and, the users of financial reports give a particular attention to the reported earnings. Reporting the low-quality earnings and those, which are not reflective of the company’s actual performance, will lead to inappropriate allocation of resources and will cause to reduce the economic growth. On the other hand, such earnings have not the required efficiency and will direct the resources from projects with real returns toward unrealistic projects with false and unreal returns. Identification of determinants (effective variables in) of earnings quality is very significant to legislative authorities and for improving the earnings quality. In the studies addressing the determinants of earnings quality, the determinants play the role of independent variable and the earnings quality has its role of dependent variable. There are various factors affecting the earnings quality. In this investigation, the most important determinants of earnings quality and their components are discussed including the Firm characteristics, financial reporting practices, corporate governance mechanisms, auditor’s, incentives of capital markets, management characteristics and external factors.