Minimizing risk of earnings surprise in accrual estimation

Abstract

Being a multinational company today requires an effective handling of its international financial operations. In order to efficiently manage the cash flow for service-based operations, the practice of accrual accounting is commonly used. However, estimating accrual amounts contains a significant risk factor which can minimize the actual benefits. Accurate and appropriate estimation techniques are required to reduce the risks associated with the accrual data analysis. For an international company, the worldwide accrual amount is a function of the amounts accrued by individual countries. Risks associated with the accrual predictions at the country level contribute significantly to the overall estimates. Simple trend analysis and trend exploration techniques are common ways to estimate accrual amounts, however, traditional time series methods may not be the best choice for this important financial estimate. Consequently, a tailored forecasting method needs to be developed that best addresses this problem and minimizes the risk of erroneous accruals. The probabilistic forecasting model, proposed herein, handles the complexities of multinational accruals and provides better estimations, both at the worldwide and the country level with greater precision. Copyright © (2008) by the American Society for Engineering Management.