THE INTRA-YEAR DELAY OF INTERIM DISCRETIONARY ACCRUALS

Current financial accounting practice allows managers' considerable discretion in determining the magnitude of accruals and the timing of accruals reporting. Accounting Principles Board (APB) Opinion No. 28: Interim Financial Reporting adopted an integral approach which further enhanced managers' ability to either defer or accrue certain expenses depending on their expectations about the results of operations for the remainder of the fiscal year. However, it is not entirely clear that managers use this discretion to report their unbiased belief about the results of operations within a fiscal year. This study investigates the seasonal pattern of three proxies of discretionary accruals: (1) total accruals (TA), (2) current accruals (CA), and (3) noncurrent accruals (NCA). Using 76,634 observations from 2,398 NYSE/AMEX firms for which data is available in the 1995 Compustat Primary-Supplementary-Tertiary (PST), Backdata and Research files, we demonstrate that discretionary accruals are significantly larger in the fourth quarter than in the other quarters. We also document that accruals generally increase as each quarter goes by. While fourth quarter revenues are somewhat larger than those in other quarters, the seasonality of revenues does not fully explain the seasonality of accruals. This implies that the seasonality of accruals does not arise from the underlying seasonality of the operating activity of firms. These results are robust across different industries, firm sizes and fiscal Year-ends.