Download or read book The Effects of Earnings Management on Enforcement Releases and Their Recognition in Audit Fees written by Balthasar Hoehn and published by . This book was released on 2013 with total page 33 pages. Available in PDF, EPUB and Kindle. Book excerpt: In 2004 German legislation established the Financial Reporting Enforcement Panel. In 147 cases since then, the panel has ordered the announcement of errors in previously disclosed and audited financial statements of German firms. We use this unique dataset to evaluate the consequences of increasing earnings management over time on enforcement releases and their recognition in audit fees. Ettredge et al. (2010) provide evidence on a phenomenon called 'balance sheet bloat' that is due to income increasing earnings management and later influences the disclosure of misstated financial statements. Thus, the evidence of earnings management recognition in audit fees (Abbott et al. 2006) and the hypothesis of future information content in fees by Stanley (2011) leads us to hypothesize that auditors recognize increasing audit risk in audit fees before the enforcement process starts. We extend related earnings management and audit fee literature by modeling the development of earnings management within the misstatement firms and systematically link it to auditor reactions. We find significant predictive power of different commonly used accrual measures for enforcement releases in the period prior and up to the misstatement period. In this period of time, we also observe an audit fee increase, e.g. the recognition of increased audit risk. We investigate an audit fee effect after the misstatement period but find no significant relation.
Download or read book Financial Reporting on Earnings Management written by David Onditi and published by GRIN Verlag. This book was released on 2019-09-23 with total page 9 pages. Available in PDF, EPUB and Kindle. Book excerpt: Essay from the year 2017 in the subject Business economics - Accounting and Taxes, grade: A, University of Nairobi, language: English, abstract: This paper discusses the motives behind earnings management and explains some of the methods used by firms to manage their earnings. Earnings management has been defined differently by a number of scholars. It is important to note that there is a thin line between fraud and earnings management. Hamid, Hashim and Salleh citing the works of Brown, Perols and Lounge and Erickson, Hanlon and Maydew noted the difference in the definitions that are offered by the scholars. According to Perols and Lounge organizations will engage in fraud due to the constraints on earnings management. The research found out that the firms that had engaged in earnings management will be more likely to be involved in cases of fraud. Brown and Erickson et al noted that the difference between earnings management and fraud is that earnings management is usually within the scope of the generally accepted accounting principles (GAAP) while fraud is outside of the boundaries of GAAP. Earnings management has been defined as the manipulation of the financial statements and reports by the managers so that the firms can earn extra profit. It has also been defined as the action where the management of the organizations apply their own self-assessment in the communication of the financial information and transactions to modify the financial data for two main reasons: 1) influencing contractual businesses that solely rely on the financial information or 2) providing the stakeholders with a wrong impression about the financial position of the firm.
Download or read book How are Earnings Managed written by Mark W. Nelson and published by . This book was released on 2003 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper reports descriptive evidence about how managers attempt to manage earnings, based on a sample of 515 earnings-management attempts obtained from a survey of 253 experienced auditors (and also analyzed by Nelson et al. 2002). We classify attempts first according to primary approach: expense recognition, revenue recognition, issues unique to business combinations, and other issues. Then, within each of those broad categories, we subclassify attempts by the particular approach used in the attempt. For each specific approach, we report the accounts involved, the frequency with which the approach increased or decreased current-period income (and the frequency of adjustments required by the auditor), and provide descriptions by auditors of income-increasing and income-decreasing examples of the more frequent approaches. We also link our findings to recent SEC Accounting and Auditing Enforcement Releases ("AAERs") that illustrate extreme versions of the specific approaches identified by our participants. This experienced-based, example-rich framework and frequency data should assist investors, auditors, audit committees, and other participants in the financial reporting process who need to be vigilant for earnings-management approaches.
Download or read book Earnings Management written by Joshua Ronen and published by Springer Science & Business Media. This book was released on 2008-08-06 with total page 587 pages. Available in PDF, EPUB and Kindle. Book excerpt: This book is a study of earnings management, aimed at scholars and professionals in accounting, finance, economics, and law. The authors address research questions including: Why are earnings so important that firms feel compelled to manipulate them? What set of circumstances will induce earnings management? How will the interaction among management, boards of directors, investors, employees, suppliers, customers and regulators affect earnings management? How to design empirical research addressing earnings management? What are the limitations and strengths of current empirical models?
Download or read book Abnormal Audit Fees and Earnings Management Using Classification Shifting written by Xudong (Daniel) Li and published by . This book was released on 2018 with total page 50 pages. Available in PDF, EPUB and Kindle. Book excerpt: Prior research has intensively debated whether abnormal audit fees purely indicate audit effort or client-auditor economic bonding (Francis 2011). However, this empirical debate is mostly based on the findings of the associations between audit fees and accrual-based earnings management. Unlike accrual-based earnings management, earnings management through classification shifting does not change the bottom-line numbers and thus involves lower litigation costs. Given the difference in litigation costs between the two forms of earnings management, the effect of abnormal audit fees on the incentives of auditor in dealing with the behavior of earnings management could be different. It is thus interesting to examine how audit fees affect auditors' incentives on their clients' earnings management with potential lower litigation risks.Using data from years 2000-2010, we find a significant and positive cross-sectional association between the magnitude of abnormal audit fees and the level of classification shifting, a result supporting the notion that greater abnormal audit fees allow for more earnings management through classification shifting. This observed result further indicates that using abnormal audit fees to purely measure audit effort or economic bonding might be questionable as the effect of abnormal audit fees on opportunistic accounting practices could differ, depending on the specific form of earnings management activities associated with the level of potential litigation costs.
Download or read book Accounting and Auditing Enforcement Releases Cash Flow Evidence Associated with Revenue Recognition Fraud written by Irana Scott and published by . This book was released on 2012 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: In an attempt to predict financial statement fraud, prior accounting research has considered the characteristics of firms that manipulate their financial statements. The aforementioned studies have included various fraud types and often focus on accruals manipulations of the financial statements. In contrast, this study concentrates on a specific type of fraud, revenue manipulations, and the effect of this fraud type on the firm's cash flows. This is an important issue as fraud (and related cash flow) is directly related to the firm's ability to remain viable. This three-paper dissertation contributes to existing literature by separating revenue manipulations from other types of fraud and looking at cash flows instead of accruals as an indicator of the fraud. The first paper investigates cash flows from operations to see if they are abnormally low during the period when firms are fraudulently increasing revenues. The second paper examines whether management will decrease discretionary expenditures in order to increase the abnormally low cash flows and hide the manipulation. Asset sales are explored in the third paper. Management may sell assets when manipulating revenues since cash flows are low and external financing is harder to obtain. Results indicate that cash flows are abnormally low during a period of revenue manipulation, but discretionary expenditures are not decreased to hide the manipulation. In addition, asset sales are more likely when firms manipulate revenues. Taken together, this research suggests that revenue manipulation and cash flow analysis is important in the early detection of fraud, governed by the Securities and Exchange Commission. The results of this study can benefit auditors, investors, regulators, and creditors as they examine the quality of revenue recognition practices by management. The results could also support discussion of the value of the cash flow statement in predicting financial statement fraud. Accountants are currently debating the validity of the appropriate financial statement that best represents the firm's future operational viability. .
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 The Financial Numbers Game written by Charles W. Mulford and published by John Wiley & Sons. This book was released on 2011-03-10 with total page 422 pages. Available in PDF, EPUB and Kindle. Book excerpt: Praise for The Financial Numbers Game "So much for the notion 'those who can, do-those who can't, teach.' Mulford and Comiskey function successfully both as college professors and real-world financial mercenaries. These guys know their balance sheets. The Financial Numbers Game should serve as a survival manual for both serious individual investors and industry pros who study and act upon the interpretation of financial statements. This unique blend of battle-earned scholarship and quality writing is a must-read/must-have reference for serious financial statement analysis." --Bob Acker, Editor/Publisher, The Acker Letter "Wall Street's unforgiving attention to quarterly earnings presents ever increasing pressure on CFOs to manage earnings and expectations. The Financial Numbers Game provides a clear explanation of the ways in which management can stretch, bend, and break accounting rules to reach the desired bottom line. This arms the serious investor or financial analyst with the healthy skepticism required to drive beyond reported results to a clear understanding of a firm's true performance." --Mark Hurley, Managing Director, Training and Development, Global Corporate and Investment Banking, Bank of America "After reading The Financial Numbers Game, I feel as though I've taken a master's level course in financial statement analysis. Mulford and Comiskey's latest book should be required reading for anyone who is serious about fundamentally analyzing stocks." --Harry Domash, San Francisco Chronicle investing columnist and investment newsletter publisher
Download or read book Earnings Quality written by Patricia M. Dechow and published by Research Foundation of the Institute of Chartered Financial Analysts. This book was released on 2004-01-01 with total page 152 pages. Available in PDF, EPUB and Kindle. Book excerpt:
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 How do Auditors View Managers Voluntary Disclosure Strategy The Effect of Earnings Guidance on Audit Fees written by Gopal V. Krishnan and published by . This book was released on 2011 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: The objective of this study is to examine the relation between attributes of earnings forecasts issued by managers and audit fees. Although there is an extensive literature on managers' disclosure of earnings forecasts, there is a paucity of research on how auditors incorporate information from these voluntary disclosures. We find that the issuance of an annual or quarterly management earnings forecast in the prior period is positively associated with the current period audit fees. Our results indicate that on average, audit fees are higher by about 7% for firm-years associated with an annual forecast. Among the firms that issue earnings forecasts, we find no association between audit fees and likelihood of updating a previously issued earnings forecast, indicating that auditors do not view such behavior negatively. Further, we find audit fees to be positively associated with the error and the bias (or optimism) in the forecasts for annual forecasts but not for quarterly forecasts. Overall, these results suggest that management's forecast behavior captures higher business risk for the auditor via greater risk of earnings management or litigation risk.
Download or read book Annual Report of the SEC written by United States. Securities and Exchange Commission and published by . This book was released on 1935 with total page 674 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Earnings Quality written by Jennifer Francis and published by Now Publishers Inc. This book was released on 2008 with total page 97 pages. Available in PDF, EPUB and Kindle. Book excerpt: This review lays out a research perspective on earnings quality. We provide an overview of alternative definitions and measures of earnings quality and a discussion of research design choices encountered in earnings quality research. Throughout, we focus on a capital markets setting, as opposed, for example, to a contracting or stewardship setting. Our reason for this choice stems from the view that the capital market uses of accounting information are fundamental, in the sense of providing a basis for other uses, such as stewardship. Because resource allocations are ex ante decisions while contracting/stewardship assessments are ex post evaluations of outcomes, evidence on whether, how and to what degree earnings quality influences capital market resource allocation decisions is fundamental to understanding why and how accounting matters to investors and others, including those charged with stewardship responsibilities. Demonstrating a link between earnings quality and, for example, the costs of equity and debt capital implies a basic economic role in capital allocation decisions for accounting information; this role has only recently been documented in the accounting literature. We focus on how the precision of financial information in capturing one or more underlying valuation-relevant constructs affects the assessment and use of that information by capital market participants. We emphasize that the choice of constructs to be measured is typically contextual. Our main focus is on the precision of earnings, which we view as a summary indicator of the overall quality of financial reporting. Our intent in discussing research that evaluates the capital market effects of earnings quality is both to stimulate further research in this area and to encourage research on related topics, including, for example, the role of earnings quality in contracting and stewardship.
Download or read book Line Item Analysis of Earnings Quality written by Melumad Nahum and published by Now Publishers Inc. This book was released on 2009 with total page 159 pages. Available in PDF, EPUB and Kindle. Book excerpt: Line-Item Analysis of Earnings Quality provides a comprehensive summary and analysis of the specific earnings quality issues pertaining to key line item components of the financial statements. After providing an overview of earnings quality and earnings management, Line-Item Analysis of Earnings Quality analyzes key line items from the financial statements. For each key line item, the authors: review accounting principles; discuss implications for earnings quality; evaluate the susceptibility of the item to manipulation; describe analyses and red flags which may inform on the item's quality. Line-Item Analysis of Earnings Quality will prove useful in conducting fundamental and contextual analyses through its analysis and evaluations.
Download or read book Accounting Irregularities and Financial Fraud written by Michael R. Young and published by Aspen Law & Business Publishers. This book was released on 2002 with total page 337 pages. Available in PDF, EPUB and Kindle. Book excerpt: An indispensable 'how-to' book on dealing with, and preventing, a professional disaster. It teaches the origins of accounting irregularities, how fraud goes undetected, what to do when problems surface, and how to prevent inconsistencies. All relevant material is covered and includes real-world instances of financial fraud. Includes a practical FREE CD-ROM!
Download or read book Accounting Series Releases written by and published by . This book was released on 1976 with total page 520 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Ethnostatistics written by Robert P. Gephart and published by SAGE Publications, Incorporated. This book was released on 1988-02-01 with total page 72 pages. Available in PDF, EPUB and Kindle. Book excerpt: This volume discusses ethnostatistics - the interpretative study of the construction and use of statistics in social research - and will be of equal interest to qualitative and quantitative researchers across the social sciences. On the understanding that the development of a statistic is inherently a qualitative act, the author shows how this act can be studied and analyzed. The interpretative factors in statistical work can be demonstrated at a variety of levels; Gephart shows how each can be usefully illuminated through the use of ethnostatistics to produce more effective, reflexive social research.
