Download or read book How are Earnings Managed An Examination of Specific Accruals written by Christine I. Wiedman and published by . This book was released on 2004 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: There is relatively little evidence on the specific accruals used to manage earnings. This paper examines this issue by considering the use of specific accruals in three earnings management contexts: equity offerings, management buyouts, and firms avoiding earnings decreases. We argue that the costs of managing earnings through different income statement items vary and that the benefits of earnings management through each of these items depend upon the context. We thus make differential predictions regarding which specific accrual will be used to manage earnings in each of the three contexts we consider. To measure earnings management for specific accruals, we develop performance-matched measures to capture the unexpected component of accounts receivable, inventory, accounts payable, accrued liabilities, depreciation expense, and special items. Consistent with our predictions, we find that firms issuing equity appear to prefer managing earnings upward by accelerating revenue recognition. Specifically, we find that accounts receivable for these firms are unexpectedly high. Conversely, for the management buyout context we predict and find unexpected accounts receivable to be negative. For firms trying to avoid reporting an earnings decrease, we expect firms to be less concerned with earnings persistence and therefore more likely to use more transitory, and less costly, items to achieve their goal. We find that special items are significantly more positive for this group. This paper provides a further step towards understanding how the incentives behind earnings management affect the method used to achieve earnings goals and also illustrates the usefulness of examining individual accruals in specific contexts.

Download or read book Introduction to Earnings Management written by Malek El Diri and published by Springer. This book was released on 2017-08-20 with total page 120 pages. Available in PDF, EPUB and Kindle. Book excerpt: This book provides researchers and scholars with a comprehensive and up-to-date analysis of earnings management theory and literature. While it raises new questions for future research, the book can be also helpful to other parties who rely on financial reporting in making decisions like regulators, policy makers, shareholders, investors, and gatekeepers e.g., auditors and analysts. The book summarizes the existing literature and provides insight into new areas of research such as the differences between earnings management, fraud, earnings quality, impression management, and expectation management; the trade-off between earnings management activities; the special measures of earnings management; and the classification of earnings management motives based on a comprehensive theoretical framework.

Download or read book Earnings quality and earnings management written by Sanjay Wikash Bissessur and published by Rozenberg Publishers. This book was released on 2005 with total page 217 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Earnings Management The Influence of Real and Accrual Based Earnings Management on Earnings Quality written by and published by GRIN Verlag. This book was released on 2024-01-31 with total page 81 pages. Available in PDF, EPUB and Kindle. Book excerpt: Master's Thesis from the year 2019 in the subject Business economics - Accounting and Taxes, University of Duisburg-Essen, course: Master Thesis, language: English, abstract: This paper delves into various theories and approaches, aiming to define and differentiate earnings management from related concepts such as fraud, expectation management, and impression management. It explores the goals and incentives driving earnings management, including maximizing or minimizing earnings, beating targets, and smoothing. At the onset of the new millennium, corporate scandals rocked the business world, eroding trust in management, boards of directors, and the accounting profession. In response, regulations and policies aimed at enhancing corporate governance and financial reporting were swiftly implemented. The credibility, clarity, and consistency of financial reporting practices play a pivotal role in enabling investors to make informed decisions. Accurate and fair financial performance representations, as opposed to inflated and misleading figures, are essential for market players, including shareholders and creditors. Investors rely on audited financial reports to guide their investment decisions, underscoring the critical importance of accuracy and reliability in publicly available financial disclosures. Auditors, by reducing the risk of material misstatement, ensure the integrity of the information disclosed in a company's financial statements. Management, with the goal of achieving promised targets and ensuring the company's existence, may engage in earnings management as a strategic contribution to corporate policy. Financial reporting serves as a means to distinguish well-performing companies from their counterparts, facilitating efficient resource allocation and empowering stakeholders to make effective decisions. The disclosed earnings results significantly impact a firm's overall business activities and management decisions, particularly in satisfying analysts' expectations, which can influence equity value. While accounting standards play a role, the quality of financial statements is more influenced by company-specific and institutional factors shaping managers' incentives. These factors lead to financial reporting practices being viewed as the outcome of a cost-benefit assessment.

Download or read book Accounting based Earnings Management and Real Activities Manipulation written by Wei Yu and published by . This book was released on 2008 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: In the first essay, I examine the association between auditor industry specialization and earnings management choices. Prior research suggests that industry specialist auditors constrain accounting-based earnings management. But such actions may cause client companies to seek alternative means to manage earnings. Specifically, companies that hire industry specialist auditors may alter operating decisions to meet earnings targets, referred to as real activities manipulation. This essay investigates whether clients of industry specialist auditors that have an incentive to manage earnings are constrained from managing earnings through accruals manipulation and, therefore, are more likely to engage in real activities manipulation. Further, I examine whether operating performance declines for firms suspected of real activities manipulation. My findings indicate that clients of industry specialist auditors with incentives to manage earnings have lower absolute value of accruals relative to firms with incentives to manage earnings that do not hire industry specialist auditors. These clients of industry specialist auditors are also more likely to engage in real activities manipulation, suggesting this is a possible unintended consequence of hiring an industry specialist auditor. I also document evidence that firms suspected of real activities manipulation have lower future operating performance relative to firms not suspected of real activities manipulation.

Download or read book Earnings Accruals and Real Activities Management around Initial Public Offerings written by Peter Ising and published by Springer Gabler. This book was released on 2014-04-30 with total page 240 pages. Available in PDF, EPUB and Kindle. Book excerpt: The beginning of the new millennium was characterized by company scandals in accounting around the world. A transparent and fair presentation of financial statements is beneficial for capital market participants. Especially around initial public offerings different incentives of these players exist to influence financial statements in diverse aspects. Therefore, studies of earnings management try to identify abnormal behavior. This thesis covers additional aspects to shed light on substantial drivers of discretionary reporting behavior around going public. Factors like influence on real activities, industry affiliation, and specific years in the IPO process add further insight to this theoretical and practical topic. The dependence on these factors is high and confirm that company specifics are important for interpretation of results.

Download or read book Stock Returns Earnings Management and Discretionary Accruals written by Brett D. Cotten and published by . This book was released on 2005 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Industry specific Discretionary Accruals and Earnings Management written by Atif Ikram and published by . This book was released on 2011 with total page 84 pages. Available in PDF, EPUB and Kindle. Book excerpt: Chapter 3 extends the decomposition to examine the role of firm-specific and industry-specific discretionary accruals in explaining the subsequent market underperformance and negative analysts' forecast errors documented for firms issuing equity. I examine the post-issue market returns and analysts' forecast errors for a sample of seasoned equity issues between 1975 and 2004 and find that offering-year firm-specific discretionary accruals can partially explain these anomalous capital market outcomes. Nonetheless, I find this predictive power of firm-specific accruals to be more pronounced for issues that occur during 1975 - 1989 compared to issues taking place between 1990 and 2004. Additionally, I find no evidence that investors and analysts are more overoptimistic about the prospects of issuers that have both high firm-specific and industry-specific discretionary accruals (compared to firms with high discretionary accruals in general). The results indicate no role for industry-specific discretionary accruals in explaining overoptimistic expectations from seasoned equity issues and suggest the importance of firm-specific factors in inducing earnings manipulation surrounding equity issues.

Download or read book Trends in Accrual Quality and Real Activity based Earnings Management in the Pre and Post Sarbanes Oxley Eras written by Nicholas Christopher Lynch and published by . This book was released on 2008 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: An increase in the prevalence of earnings restatements and cases of financial statement fraud in the early 21st century led to a significant loss of market capitalization and investor confidence in the attestation process. In an effort to restore such confidence, Congress passed the Sarbanes-Oxley Act (SOX) in July of 2002. The Act significantly increased the penalties for engaging in accrual activities aimed at either misleading users of the financial statements concerning the underlying economic condition of the firm or influencing contractual outcomes. As a result of the increased penalties for engaging in accrual activities, one would expect a relative shift from accrual activities to real activities to facilitate earnings management in the post-SOX period. As with most academic social disciplines, the test employed in my dissertation is a joint test of the sensitivity of the tools available to detect management activities, the research design, and the presence and strength of the effect for which I am searching. This dissertation is the first to test for changes in both accrual quality and real activity-based earnings management in the post-SOX period. The findings of the study empirically support a change in earnings management techniques in the post-SOX period compared to the pre-SOX period. Specifically, the quality of accruals incorporated into the accounting earnings figure have significantly increased in the post-SOX period. However, instances of earnings management using real activities have also significantly increased in the post-Sox period. These findings inform academics about the power of the tools used in academic accounting research and the overall quality of the argument. They inform users of financial statements about where to direct their attention in reading and evaluating the financials. Finally, they inform regulators, practitioners and policy makers of the effectiveness of the law at improving the quality of accruals, and bring to their attention a potential substitution in the techniques used to manage earnings.

Download or read book Method Shifting in Accruals Management written by Ke Zhong and published by . This book was released on 2005 with total page 236 pages. Available in PDF, EPUB and Kindle. Book excerpt: The American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 97-2 to limit the considerable discretion in revenue recognition practiced by software firms. The more stringent rules of SOP 97-2 may reduce earnings management by constraining the degree to which managers can manage revenues. However, to the degree that managers have other methods available to manage earnings, SOP 97-2 might not reduce earnings management to the same degree as it reduces revenue management, because managers could shift earnings management from revenue management to expense management. The purpose of this study is to assess whether SOP 97-2 significantly reduces revenue management and earnings management of software firms, and whether the method shifting mitigates the effect of SOP 97-2 on earnings management. The degree to which software firms manage revenues, expenses, and earnings was measured as the strength of managers' reactions to a selected incentive of earnings management. The selected incentive of earnings management is the demand for attracting external financing. Managed revenues, managed expenses, and managed earnings were estimated from models adapted from the Modified Jones model. Regression analyses were employed to test whether the correlations between the incentive variable and the dependent variables (managed revenues, managed expenses, and managed earnings) are different for pre-SOP 97-2 than for post-SOP 97-2. The event window of SOP 97-2 is from June 1996 to December 1997. The sample periods are the fiscal year before and after the event window. The sample includes 744 software firms and 248 non-software firms. Non-software business service firms were included as a control group to account for potential confounding events. The study found that the correlation between the incentive variable and managed revenues decreased after SOP 97-2, which suggests that SOP 97-2 effectively reduced revenue management of software firms. The results also suggest that software firms during the sample periods managed revenues rather than bottom-line earnings. The study did not find evidence supporting the hypothesis that software firms shifted from revenue management to expense management after SOP 97-2.

Download or read book An Examination of the Association Between Earnings Management and Type of Accounting Standards written by Yu Chen and published by . This book was released on 2010 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation examines the effects of types of accounting standards on earnings management from a global perspective. I examine the ability or inability of principles-based as well as rules-based accounting standards in curbing accruals earnings management and real activities earnings management. I also examine the roles played by internal corporate governance, audit quality and external corporate governance in this potential relationship between types of accounting standards and earnings management. The results show that under the condition of weak (strong) internal corporate governance, companies that use principles-based standards tend to engage in more (less) accruals earnings management compared with companies that use rules-based standards. Due to the substitution effect, companies that use principles-based standards tend to engage in less real activities earnings management compared with companies that use rules-based standards under the weak internal corporate governance condition. Similarly, high audit quality tends to curb both accruals earnings management and real activities earnings management no matter what types of accounting standards companies use. However, regardless of audit quality, companies that use rules-based standards engage less in accruals earnings management compared with those use principles-based standards. Furthermore, regardless of audit quality, companies that use rules-based standards engage more in real activities earnings management compared with those that use principles-based standards. These findings have important implications for investors, regulators and educators.

Download or read book Evidence on the Tradeoff Between Real Manipulation and Accrual Manipulation to 25 Pages 26 to 50 Pages 51 to 75 Pages 76 to 100 Pages 101 to 120 written by Amy Yunzhi Zang and published by ProQuest. This book was released on 2000 with total page 120 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Estimating Abnormal Accruals for Detection of Earnings Management written by Lakshmanan Shivakumar and published by . This book was released on 2002 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper addresses certain methodological issues that arise in estimating abnormal (or discretionary) accruals for detection of event-specific earnings management. This paper examines the specification of time-series models as well as cross-sectional models of expected accruals using annual as well as quarterly data. I show that time-series models provide highly imprecise estimates of abnormal accruals due to the small number of observations used in estimating the parameters of the models. I also show that the cross-sectional Jones model, though well specified for randomly chosen firms, is mis-specified for firms with cash flows either above or below their industry median. This paper develops a model for expected accruals which is well specified for all cash flow levels. Further, using simulation analysis, I show that the model developed in this paper is more powerful at detecting earnings management than the cross-sectional Jones model. In addition, this paper examines the impact of audits on the ability of managers to manage reported earnings. Finally, this paper examines the limitations of the models proposed by Dechow, Sloan and Sweeney (Accounting Review, 1995) and by Kang and Sivaramakrishnan (Journal of Accounting Research, 1995).

Download or read book The Use of Accruals in Earnings Management written by Paul K. Chaney and published by . This book was released on 2012 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: We suggest and present evidence that managers use discretionary accruals to smooth income around the managers' assessment of the firms' permanent earnings. We suggest that income smoothing is a long-term strategy which accomplishes multiple purposes. We form predictions regarding the direction of discretionary accruals in a given year by comparing income before discretionary accruals to the previous year's reported earnings. We further hypothesize and present evidence that earnings response coefficients which measure the extent to which reported earnings reflect the information used by the market in forming prices are higher for firms that engage consistently in income smoothing.

Download or read book Measuring the Pervasiveness of Earnings Management from Quarterly Accrual Volatility written by Zhaoyang Gu and published by . This book was released on 2008 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: Earnings management is a key issue for financial reporting. The purpose of this paper is to derive a set of indices to measure the pervasiveness of earnings management (PEM) using the properties of quarterly accrual volatility. The PEM index can be viewed as a quality measure of financial reporting and an effectiveness measure for financial monitoring. In contrast to mean-shifting studies in the literature, our measure based on accrual volatility yields two major advantages. First, it relieves us of the necessity of precise assumptions regarding economic events. Second, it provides a macro-perspective on the overall patterns in earnings management. The methodology based on accrual volatility can address issues like the earnings quality, the nature of the informational environment, and the effect of accounting standard setting. The seasonal pattern of accrual volatility can provide a trace of earnings management, even in the absence of further information about specific economic events and resulting managerial actions. Our working hypothesis is that pervasive earnings management leads to the first order stochastic dominance of fourth quarter accrual volatility over the other three quarters. We provide evidence on the relations between previously documented drivers of earnings management and seasonal accrual heteroskedasticity. These drivers include executive compensation, regulatory requirements, bond covenants, and political costs. This empirical support of our working hypothesis validates our application of Kolmogorov-Smirnov (KS) Distance to measure the pervasiveness of earnings management (PEM). We use raw total accruals as the basis for measuring PEM1 and use residuals from Jones? [1991] model to control for mechanical factors in our measurement of PEM2. The usefulness of controls is an empirical issue. Our results suggest that additional controls do not add much power to detect earnings management over and above the simplest measure based on total accruals. KS Distance is powerful in detecting the difference around the central locations of two distributions, but not powerful at the tail ends. We develop two other measures for PEM. First, we estimate the fraction of fourth quarter accruals volatility exceeding the 95th percentile value for the first three quarters (base period) distribution. This fraction, reduced by 5%, constitutes PEM3. Second, we design a simulation method to determine PEM4 as the percentage of firms with a given magnitude of accrual adjustment for the base period accrual volatility to match that of the fourth quarter. Both PEM3 and PEM4 are estimates of percentage of firms involved in earnings management of a given magnitude. However, we should note here that our PEM indices are more likely ordinal than cardinal measures. Though our methods of measuring PEM rely on indirect measurement, we provide direct evidence on the relevance of our method through a series of external validation checks. First, we use a subsample of firms subject to SEC actions relating to alleged earnings manipulation. This data was collected from Accounting and Auditing Enforcement Releases (AAER's) by the SEC. We compare PEM?s for the AAER sample to PEM?s for the COMPUSTAT sample to assess the power of our measures. The PEM indices for the AAER sample are two to three times as large as the PEM indices for the COMPUSTAT sample. Though we avoid interpreting the relative magnitudes literally, these differences do suggest a positive correlation between our PEM indices and the degree of earnings management. Second, we conduct case studies for 10 firms identified by fourth quarter accrual volatility as strongly suspect of earnings management. These studies show that suspect firms frequently engage in activities associated with earnings management, such as CEO turnover, restructuring, public offerings, or they experience losses. Applying our PEM indices to COMPUSTAT data, we find that pervasiveness of earnings management has been relatively stable in the period of 1988-1996.

Download or read book Discretionary Accruals and Earnings Management written by Benjamin C. Ayers and published by . This book was released on 2009 with total page 46 pages. Available in PDF, EPUB and Kindle. Book excerpt: We investigate whether the positive associations between discretionary accrual proxies and beating earnings benchmarks hold for comparisons of groups segregated at other points in the distributions of earnings, earnings changes, and analysts-based unexpected earnings. We refer to these points as quot;pseudoquot; targets. Results suggest that the positive association between discretionary accruals and beating the profit benchmark extends to pseudo targets throughout the earnings distribution. We find similar results for the earnings change distribution. In contrast, we find few positive associations between discretionary accruals and beating pseudo targets derived from analysts-based unexpected earnings. We develop an additional analysis that accounts for the systematic association between discretionary accruals and earnings and earnings changes. Results suggest that the positive association between discretionary accruals and earnings intensifies around the actual profit benchmark (i.e., where earnings management incentives may be more pronounced). We find similar effects around the actual earnings increase benchmark. However, analogous patterns exist for cash flows around the profit and earnings increase benchmarks. In sum, we are unable to eliminate other plausible explanations for the associations between discretionary accruals and beating the profit and earnings increase benchmarks.

Download or read book Incentives of Earnings Overstatements that Violate Gaap written by Ling-chi Cheng and published by . This book was released on 2007 with total page 46 pages. Available in PDF, EPUB and Kindle. Book excerpt: Abstract: Using earnings restatement firms, this study takes a disaggregate approach to examine two issues related to earnings management: (1) are specific accruals related to specific types of earnings manipulations as admitted by the restatement firms; and (2) does management, concerned with the benefits/costs of different accrual manipulations, manipulates different accruals and/or income statement variables to accomplish managerial goals. We examine three decision contexts where earnings manipulations are called for to achieve specific managerial goals: (1) issuance of equity shares; (2) avoidance of debt contract violations; and (3) meeting earnings threshold. We provide the evidence that total accruals can relatively easier to identify earnings management than individual accruals. We also find that managers are concerned with benefits/costs when deciding specific accruals/indexes to be manipulated.