Earnings quality
Abstract
Regulators, academics, and practitioners all have their own interpretation of earnings quality; that is, there is no consistent definition of earnings quality across these three important groups. Regulators view quality earnings as reported earnings that protect investors by providing reliable financial information concerning the company. Academics' perspective is that high quality earnings are based on the relevance of the reported earnings information to shareholders, creditors, and other users of the financial information. Practitioners define earnings quality as earnings that are sustainable, repeatable, and reflect long-term trends. While there are multiple interpretations of earnings quality, an overarching concept can be determined. Regulators, academics, and practitioners perceive earnings in a way that they feel helps to support investors' needs; the area of agreement for all is due to their focus on the users of earnings. As a whole, earnings quality is information that reflects high quality earnings relevant to a firm's financial performance, through persistence, predictive ability, and the reflection of long-term trends.