[1] It is an assessment criterion for how "repeatable, controllable and bankable"[citation needed] a firm's earnings are, amongst other factors, and has variously been defined as the degree to which earnings reflect underlying economic effects, are better estimates of cash flows, are conservative, or are predictable.
This use of judgment by management thus increases the chances that the earnings presented in a firm's financial statements may have been manipulated.
Furthermore, the fact that firms have different fundamental business characteristics increases the possibility of error in or manipulation of presented earnings.
This discretion, however, increases the possibility for firms to make both honest mistakes, such as the accidental use of a wrong useful life, or to manipulate earnings.
In other words, conservative decisions by management in a single period should not be used as sole proof of earnings quality.