Earnings Management

Corporate governance Financial reporting and the independent auditor 1 The potential exercise of this choice to improve apparent performance (see creative accounting and earnings management) increases the information risk for users

Business ethics - Other issues 1 Oxford: Blackwell ISBN Particular corporate ethical/legal abuses include: creative accounting, earnings management, misleading financial analysis, insider trading, securities fraud, bribery/kickbacks and facilitation payments

Creative accounting - Earnings management 1 'A review of the earnings management literature and its implications for standard setting', Accounting Horizons, December 1999, pp

Accounting - Accounting scandals 1 Lys: Trends in Earnings Management and Informativeness of Earnings Announcements in the Pre- and Post- Sarbanes Oxley Periods (Kellogg School of Management, Evanston, Illinois, February, 2005) p

Financial statement analysis 1 Another example is to adjust the reported numbers when the analyst suspects earnings management.

Earnings management 1 “A Review of the Earnings Management Literature and Its Implications for Standard Setting.” Accounting Horizons 13 (4): 365–

Earnings management 1 Earnings management has a negative effect on earnings quality, and may weaken the credibility of financial reporting. Furthermore, in a 1998 speech Securities and Exchange Commission chairman Arthur Levitt called earnings management widespread. Despite its pervasiveness, the complexity of accounting rules can make earnings management difficult for individual investors to detect.

Earnings management - Occurrence and response by regulators 1 Ball|Ray Ball, while opining that accounting research was not reliably documenting earnings management, wrote: Of course earnings management goes on

Earnings management - Occurrence and response by regulators 1 The SEC has criticized earnings management as having adverse consequences for financial reporting, and for masking the true consequences of management's decisions. It has called on standard-setters to make changes to accounting standards to improve financial statement transparency, and has called for increased oversight over the financial reporting process. The SEC has also pressed charges against the management of firms involved in fraud|fraudulent earnings management.

Earnings management - Motivations and methods 1 Other possible motivations for earnings management include the need to maintain the levels of certain financial ratio|accounting ratios due to debt covenants, and the pressure to maintain increasing earnings and to beat analyst targets.

Earnings management - Motivations and methods 1 Earnings management may involve exploiting opportunities to make accounting decisions that change the earnings figure reported on the financial statements

Earnings management - Detecting earnings management 1 For example, research has shown that firms with large accruals and weak governance structures are more likely to be engaging in earnings management

One share, one vote - Financial reporting and the independent auditor 1 The potential exercise of this choice to improve apparent performance (see creative accounting and earnings management) increases the information risk for users

Executive pay in the United States - Stock options 1 David Aboody and Ron Kasznik, `CEO Stock Option Awards and the Timing of Corporate Voluntary Disclosures,` Journal Accounting and Economics 29 (2000): 73–100Steven Balsam, Huajing Chen, and Srinivasan Sankaraguruswamy, Earnings Management Prior to Stock Option Grants, working paper, Temple University Department of Accounting, 2003A study by David Yermack focusing on earnings announcements, found that managers are more likely to be awarded options in advance of the release of favorable earnings results that boost the stock price than in advance of unfavorable announcements and more powerful CEOs are able to obtain larger `discounts` on their options

Mutual-fund scandal (2003) - Timeline 1 *On November 30, 2004, the Securities and Exchange Commission announced “the filing..of charges against American International Group, Inc. (AIG) arising out of AIG’s offer and sale of an earnings management product.” The company “agreed to pay a total of $126 million, consisting of a penalty of $80 million, and disgorgement and prejudgment interest of $46 million.”

Mutual-fund scandal (2003) - Timeline 1 *On August 22, 2005, the Securities and Exchange Commission “filed civil fraud charges against two former officers of Bristol-Myers Squibb Company for orchestrating a fraudulent earnings management scheme that deceived investors about the true performance, profitability and growth trends of the company and its U.S. medicines business.”

Economic opportunism 1 For example, managers can tilt the details of financial reporting in such a way that it favours their own position.Lan Sun and Subhrendu Rath, Fundamental Determinants, Opportunistic Behavior and Signaling Mechanism: An Integration of Earnings Management Perspectives

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