Internal Control System, Earnings Quality and the Dynamics of Financial Reporting

 Using an earnings management model in which managers manipulate information when the firm s control system fails, I introduce a measure of earnings quality ; based on the notion of integral precision, that has solid theoretical foundations. A trade-off between the frequency and the magnitude of overstatements is shown: overstatements are larger when misreporting is less likely. Overall, the model generates a distribution of earnings announcements similar to its empirical analogue and provides a structural method to identify the likelihood and magnitude of misreporting by exploiting information from the moments of the distribution of reported earnings.