Comparing Total and Current Accruals Quality

We extend Dechow and Dichev’s [2002] model of current accruals quality (CAQ) to consider total accruals quality (TAQ). While the two measures are conceptually similar (both reflect the standard deviation of the residuals from the mapping of accruals into lead and lag cash flows), they differ in terms of the definitions of accruals and cash flows as well as the number of lead and lag cash flow terms. We find that TAQ is significantly larger than CAQ, indicating that non-current accruals are of lower quality than current accruals. Correlation tests show that CAQ serves as a reliable instrument for TAQ, insofar as we document economically large and statistically positive correlations between the two variables. These correlations vary across industries, and are stronger when total accruals are relatively smaller in absolute value. The latter is consistent with the view that smaller magnitudes of total accruals imply less estimation error.