Methods and systems for classifying entities according to metrics of earnings quality
View Patent ↗Methods and systems for classifying entities according to metrics of earnings quality are provided. At least one value corresponding to earnings quality of an entity is generated based on at least one metric of accruals, and the entity is classified according to the at least one value. For example, the entity may be classified according to the value as likely to have overstated its earnings and/or as likely to experience one or more business outcomes (e.g., a change in stock price, SEC enforcement action, and/or class-action lawsuit). As another example, multiple entities may be separated into various classes by ranking the entities according to their respective values. Such a ranking may provide useful heuristics regarding whether the entities have manipulated (e.g., overstated or understated) their earnings. Information about the classification may be made available for a fee and may allow parties to make better business and regulatory decisions.
1. A computer implemented method for qualifying an earnings quality of an entity, the method comprising:
receiving financial information for a plurality of entities;
generating, using a programmed computer, at least one value for one of the plurality of entities, wherein the at least one value corresponds to the earnings quality of the entity, wherein the value is based on a metric of accruals, and quantifies discretionary, non-cash components of earnings for the entity;
classifying, using a programmed computer, the entity according to the generated values by dividing the distribution of values into groups of related entities to provide an indicator of earnings quality for the entity relative to the related entities, wherein the earnings quality is indicative of future earnings performance, relative returns performance, the likelihood of a future earnings restatement, regulatory enforcement action, or legal enforcement action; and
making available, in electronic form, information about the classification for a fee.
2. The method of claim 1 , wherein said generating comprises generating at least one value based on a plurality of metrics of accruals.
3. The method of claim 1 , wherein said generating comprises generating at least one value based on a metric of total accruals.
4. The method of claim 3 , wherein said generating at least one value based on a metric of total accruals comprises determining a measure of net income before extraordinary items for the entity, less operating cash flows for the entity, less investing cash flows for the entity, and plus short-term investment changes.
5. The method of claim 4 , wherein said generating at least one value based on a metric of total accruals further comprises dividing the measure by average total assets for the entity.
6. The method of claim 3 , wherein said generating at least one value based on a metric of total accruals comprises determining a net change in operating assets for the entity.
7. The method of claim 1 , wherein said generating comprises generating at least one value based on a metric of operating accruals.
8. The method of claim 7 , wherein said generating at least one value based on a metric of operating accruals comprises determining a measure of net income before extraordinary items for the entity less operating cash flows for the entity.
9. The method of claim 7 , wherein said generating at least one value based on a metric of operating accruals comprises determining a net change in working capital for the entity.
10. The method of claim 1 , wherein said classifying comprises classifying the entity as likely to have overstated its earnings, as likely to have understated its earnings, as likely to experience a class-action lawsuit, as likely to experience a change in bond spreads, as likely to experience an earnings restatement, as likely to experience an SEC enforcement action, as likely to experience a change in future earnings, as likely to experience a change in stock prices, or a combination thereof.
11. The method of claim 1 , wherein said generating comprises generating a plurality of values for a corresponding plurality of entities and wherein said classifying comprises:
ranking the entities according their respective values; and
separating the entities into classes based on the rank.
12. The method of claim 11 , wherein said separating the entities into classes comprises separating the entities into deciles.
13. The method of claim 1 , wherein said making information available about the classification for a fee comprises making the information available through a network connection to a client who has paid or has contracted to pay the fee.
14. The method of claim 13 , wherein said making the information available through a network connection comprises:
receiving a request for access to the information from a computer device associated with the client;
determining whether the client has paid or has contracted to pay the fee; and
providing the device with access to the information when the client has paid or has contracted to pay the fee.
15. The method of claim 13 , wherein said making information available about the classification for a fee comprises electronically pushing the information to the client.
16. The method of claim 1 , wherein said making information available about the classification for a fee comprises:
encoding a computer-readable medium with the information about the classification; and
offering the medium for sale.
17. The method of claim 1 , wherein said making information available about the classification for a fee comprises:
encoding a computer-readable medium with computer executable instructions for performing at least one of said generating and said classifying; and
offering the medium for sale.
18. A system for providing access to earnings quality information, the system comprising:
an electronic database comprising:
financial information for a plurality of entities;
a value corresponding to the earnings quality of the plurality of entities, wherein the value correspond to the earnings quality of the entities, and are based on a metric of accruals, and quantify discretionary, non-cash components of earnings for the entity; and
a classification of the plurality of entities according to the values by dividing the distribution of values into groups of related entities to provide an indicator of earnings quality for a single entity relative to the related entities, wherein the earnings quality risk is indicative of future earnings performance, relative returns performance, the likelihood of a future earnings restatement, regulatory enforcement action, or legal enforcement action; and
a server for receiving and processing a request for access to the database from a remote device.
19. The system of claim 18 , wherein the server is configured to:
provide the remote device with access to the database when a party associated with the remote device has paid or has contracted to pay an access fee; and
deny the remote device access to the database when the party associated with the remote device has not paid or has not contracted to pay the access fee.
20. The system of claim 18 , further comprising an earnings quality application configured to:
generate at least one value corresponding to the earnings quality of the entity using data from at least one financial information database; and
store at least one value in the database comprising at least one value.
21. The system of claim 20 , wherein the entity comprises a financial services entity and wherein the earnings quality application is further configured to:
retrieve financial data for the financial services entity from a first database;
retrieve financial data for the financial services entity from a second database; and
generate at least one value corresponding to earnings quality for the financial services entity using the data from the first and the second databases.
22. The system of claim 21 , wherein:
the first database comprises the S&P Compustat database;
the second database comprises the SNL database; and
the financial data retrieved from the SNL database comprises data for total investments of the financial services entity.
23. The system of claim 18 , further comprising an earnings quality application configured to:
generate at least one value corresponding to earnings quality for the entity using data uploaded to the server from the remote device; and
store at least one value in the database comprising at least one value.
24. A non-transitory computer readable medium encoded with computer-executable instructions for performing the method comprising:
receiving financial information for a plurality of entities;
generating at least one value corresponding to earnings quality for one of the plurality of entities, wherein the at least one value corresponding to the earnings quality of the entity, wherein the value is based on a metric of accruals and quantified discretionary, non-cash components of earnings for the entity; and
classifying the entity according to the generated values by dividing the distribution of values into groups of related entities to provide an indicator of earnings quality for the entity relative to the related entities, wherein the earnings quality is indicative of future earnings performance, relative returns performance, the likelihood of a future earnings restatement, regulatory enforcement action, or legal enforcement action.