Earning quality in Failed Firms

Earnings as a most important product of accounting information systems should have adequate quality. Earnings quality has a wide meaning and many implications. In accounting literature the lack of earnings management and timeliness effects of bad news (conditional conservatism) are some aspects of causing high quality of earnings. By considering earnings management and conditional conservatism in failed firms this study seeks to analyze the earnings quality and compare it with earnings quality of sound companies. This survey conducted on the companies listed on the Tehran stock Exchange (TSE) and in the period of 1380 to 1388. The results of this research show that failed firms manage earnings upwards in three years prior to failure. This manipulation was investigated by two methods of earnings management (accounting earnings management & real activity earnings management) and shows that failed firms manage their earnings more than sound firms by real activity، but sound firms do earning management through manipulating accruals. Also this research by employing the Ball & Shivakumar model investigates the situation of conditional conservatism in failed and sound firms. It is revealed that the sound firms have more conditional conservative earnings than failed firms، and as a result sound firms have more earnings quality.