Managerial discretion in revenue recognition amidst financial restatements and implications for GAAP compliance

In this study, we examine GAAP‐compliant and non‐compliant revenue accruals among non‐fraud, non‐error restated firm‐years. The restatement setting isolates and quantifies managerial discretion in the revenue recognition process and provides insight into the role of GAAP compliance in producing predictive information. We find consistent evidence that non‐GAAP‐compliant revenue accruals are predictive of future cash receipts and total sales. We find that this main result is strongest for accrued revenues rather than deferred revenues. We find additional evidence that non‐GAAP‐compliant revenue accruals are generally more or similarly predictive of future cash receipts or total sales when compared to GAAP‐compliant revenue accruals for both restated and non‐restated firm‐years. Our findings suggest that managers’ discretion provides predictive information in the restatement setting, where managers’ judgment is likely most prevalent. We also find that ex‐post compliance with US GAAP does not isolate and remove less predictive information. Last, we fail to find reliable evidence that managers in our sample use their discretion over revenue accruals to smooth revenues or to meet or beat revenue and earnings benchmarks.