Infosys: Assessing Earnings Quality

Learning Objective

The case is suitable for graduate-level courses on financial accounting, financial statement analysis. This case is also suitable for in-house company training and management development programs for practitioners of forensic accounting and financial accounting for non-finance executives. This case helps students understand the concept of financial exploration on earnings quality using both traditional and new accounting methods. The case presents some techniques for identifying misleading practices, although they do not confirm the existence of fraud. Rather, the process highlights the need to delve deeper in the practice of revenue recognition and assess adherence to accounting standards. The case helps students understand the concept of accrual accounting and its ramifications on revenue recognition. Students will also learn about accrual ratios and discriminant models for identifying imprudent accrual practices that could impact earnings quality. After working through the case and assignment questions, students will be able tounderstand the logic of cash and accrual basis of accounting;understand the concept of imprudent financial practices (also known as “financial shenanigans”);analyze a company’s performance using the DuPont framework;assess the quarterly financial performance of a company using basic financial ratios;apply accrual ratios to reveal imprudent practices that can impact earnings quality; anddeploy a discriminant model to quantify the extent of discretionary accrual practices.