scholarly journals Earnings Management: The Role Of Accounting Professionals

2011 ◽  
Vol 1 (3) ◽  
Author(s):  
Paul J. Carruth
Keyword(s):  
Earnings Management ◽  
Financial Markets ◽  
Financial Reporting ◽  
Vital Role ◽  
Securities And Exchange Commission ◽  
Accounting Fraud ◽  
Earnings Expectations ◽  
Corporate Executives ◽  
Accounting Professionals

In todays financial markets there is a great deal of pressure for corporations to meet investors earnings expectations. Failure to do so may result in the loss of millions of dollars in stock capitalization. As a result, an increasing number of corporate executives have succumbed to the temptation to manage their earnings in order to achieve targeted profits. The number of companies under investigation by the Securities and Exchange Commission (SEC) for possible accounting fraud related to earnings management has increased significantly in recent years. This article identifies and discusses four common areas of potential financial reporting abuse: restructuring costs, miscellaneous reserve accounts, materiality, and manipulation of revenue recognition. In addition, this paper discusses the vital role of accounting professionals as gatekeepers responsible for helping to maintain the viability of our financial markets.

scholarly journals Issuance Of Subsidiary Stock As An Earnings Management Strategy

2011 ◽  
Vol 21 (1) ◽  
Author(s):  
Susan Perry Williams ◽  
Thomas H. Williams
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Management Strategies ◽  
Academic Research ◽  
Financial Statements ◽  
Research Literature ◽  
Securities And Exchange Commission ◽  
Net Income ◽  
Earnings Expectations ◽  
Income Statement

<p class="MsoNormal" style="text-align: justify; margin: 0in 0.5in 0pt; tab-stops: 1.0in 1.5in 2.0in 2.5in 3.0in 3.5in 4.0in 4.5in 5.0in 5.5in 6.0in;"><span style="font-family: Times New Roman; font-size: x-small;">Arthur Levitt, chairman of the Securities and Exchange Commission, expressed concern that the pervasiveness of earnings management in American corporate financial statements threatens the integrity of financial reporting.<span style="mso-spacerun: yes;">&nbsp; </span>Levitt referred to the &ldquo;cookie jar&rdquo; phenomenon wherein U.S. firms have earmarked opportunities to &ldquo;find gains&rdquo; when earnings are less than anticipated.<span style="mso-spacerun: yes;">&nbsp; </span>The academic research literature includes a large number of studies on earnings management strategies.<span style="mso-spacerun: yes;">&nbsp; </span>One relatively unexplored strategy is the use of stock issuances by subsidiaries to generate gains under the provisions of SEC Staff Accounting Bulletin No. 51.<span style="mso-spacerun: yes;">&nbsp; </span>Based upon a sample of 125 observations of this accounting choice over the period 1985 through 1997, our study provides compelling evidence that recognition of gains on the issuance of subsidiary stock coincides with periods when earnings fail to meet expectations (as measured by analysts&rsquo; forecasts), and that the recognition of these gains in the income statement is effective in achieving earnings expectations. Further, the amounts of these gains are large relative to pre-gain net income</span></p>

The Association between Auditor Litigation and Abnormal Accruals

2001 ◽  
Vol 76 (1) ◽  
pp. 111-126 ◽  
Author(s):  
William G. Heninger
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Securities And Exchange Commission ◽  
Financial Condition ◽  
Time Period ◽  
Abnormal Accruals ◽  
Univariate Analyses ◽  
Auditor Litigation

Concern that earnings management erodes the quality of financial reporting has prompted the Securities and Exchange Commission to question the role of the external auditor. To help address that concern, this study examines the relation between earnings management and auditor litigation. While prior research on the relation between auditor litigation and total accruals has yielded inconclusive results, I find that the risk of auditor litigation is positively associated with a sharper measure of earnings management—abnormal accruals. Using a larger and more recent sample, this study provides evidence that the probability of auditor litigation increases as clients report more positive (income-increasing) abnormal accruals. This result holds in: (1) univariate analyses, (2) logit analyses that also control for auditor size, client importance to the auditor, length of the auditor-client relationship, client industry, client financial condition, client size, and client growth, and in (3) the subsample of lawsuits alleging wrongdoing in the more recent time period (1984–1998).

The role of state ownership on earnings quality: evidence across public and private European firms

2018 ◽  
Vol 19 (2) ◽  
pp. 312-332 ◽  
Author(s):  
Cristina Gaio ◽  
Inês Pinto
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Capital Markets ◽  
Capital Market ◽  
Earnings Quality ◽  
State Ownership ◽  
Public And Private ◽  
Content Type ◽  
Large Sample

Purpose The purpose of this paper is to examine the role of state ownership on financial reporting quality regarding the characteristics of conservatism and earnings management. Design/methodology/approach Using a large sample of public and private European firms during the period 2003-2010, the authors test the hypotheses following Ball and Shivakumar’s (2005) model for conservatism and the modified Jones (1991) model proposed by Dechow and Sloan (1995) for earnings management. To ensure that the results are robust, the authors conduct sensitivity analysis with regard to potential endogeneity and selection bias. Findings The authors find that state-owned firms are less conservative than non-state-owned firms, which is consistent with the idea that there is less need for accounting conservatism due to government protection. The authors also show that capital markets play an important role in shaping the relation between state ownership and earnings management. Among public firms, the authors find that state-owned firms have higher abnormal accruals and worse accruals quality than non-state-owned firms, which suggests that state-owned firms are not immune to capital market pressures. Research limitations/implications The study has two limitations. First, as state-owned and non-state-owned firms face quite different incentive structures, management behavior might be determined by factors that have yet to be identified. Second, prior research results suggest an inverted U-shape relation between ownership concentration and earnings management (Ding et al., 2007). It would be interesting to investigate the impact of different levels of state ownership on earnings quality. Practical implications As the paper investigates the role of state ownership on earnings quality using a sample of European firms, it brings new insights regarding the role of state ownership in accounting quality and firm performance. In addition, it considers the role of capital markets in the relation between the quality of financial reporting and ownership by considering a sample with both public and private firms. Originality/value The study contributes to the debate about state intervention in the corporate sector, by extending the knowledge of the effects of government ownership on earnings quality by using a large sample of European firms. Furthermore, the authors also introduce the effect of capital market forces on managers’ behavior in state-owned and non-state-owned companies by analyzing private and publicly listed firms.

scholarly journals Venture Capital and Financial Reporting in Newly Public Firms

2018 ◽  
pp. 411-429
Author(s):  
Lars Helge Hass ◽  
Monika Tarsalewska
Keyword(s):  
Earnings Management ◽  
Empirical Evidence ◽  
Financial Reporting ◽  
Reporting Quality ◽  
Active Role ◽  
Real Earnings Management ◽  
Venture Capitalists ◽  
Public Firms ◽  
Reporting Practices

Financial intermediaries such as venture capitalists (VCs) not only provide financing, they also play an active role in firm governance and in financial practices before a firm goes public. Venture capitalists are actively engaged in monitoring and advising their portfolio firms. Thus, one also expects them to exert significant influence over the development of financial reporting practices. This chapter reviews recent literature and empirical evidence on VCs and financial reporting quality in newly public firms. It surveys the role of VCs in such activities as earnings management. In particular, it discusses how their monitoring activities and reputation can impact how their portfolio firms establish financial reporting practices. Subsequently, it also reviews the consequences of misreporting, and whether they affect VC behavior ex ante. Finally, the chapter uses recent data to provide empirical evidence on the effect of VCs on accrual and real earnings management.

SEC flexes its muscle on accounting fraud and targets more individuals

2016 ◽  
Vol 17 (2) ◽  
pp. 50-53
Author(s):  
David Woodcock ◽  
Joan McKown
Keyword(s):  
Financial Reporting ◽  
Financial Services ◽  
Design Methodology ◽  
Securities And Exchange Commission ◽  
Internal Controls ◽  
Accounting Fraud ◽  
Department Of Justice ◽  
Content Type ◽  
Practical Guidance ◽  
A Priority

Purpose To note the increase in accounting and financial reporting matters at the Securities and Exchange Commission by highlighting a number of recent cases filed by the agency. Design/methodology/approach The SEC recently announced the settlement or filing of a number of significant accounting fraud cases. Coupled with recent statements by the SEC and the Department of Justice, it is clear that accounting fraud is a priority and that individuals are in the cross-hairs. This article discusses a few of the recent cases and the trend toward more financial reporting and issuer disclosure cases. Findings The number of financial reporting and issuer disclosure cases will likely continue to increase. Individuals will be targeted in more of those cases, internal controls will be a focus, whistleblowers will continue to be important in this area, and SOX 304 clawbacks will continue to be a weapon for the SEC. Originality/value Practical guidance from experienced securities and financial services lawyers.

scholarly journals Earnings management, audit committee effectiveness and the role of blockholders ownership: Evidence from UK large firms

2012 ◽  
Vol 1 (4) ◽  
pp. 100-116 ◽  
Author(s):  
Murya Habbash
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Audit Committee ◽  
Family Firms ◽  
Agency Problems ◽  
Audit Committees ◽  
Effective Control ◽  
Agency Conflicts ◽  
Controlling Shareholders

The existing literature documents that the quality of financial reporting is higher when firms have effective audit committees. However, recent studies find that audit committees are not effective in family firms where agency conflicts arise between controlling and non-controlling shareholders. This study extends the previous findings by investigating the effectiveness of audit committees in firms with similar agency conflicts when one owner obtains effective control of the firm. Compared to firms with a low level of block ownership, high-blockholder firms face less agency problems due to the separation of ownership and management, but more severe agency problems between controlling (blockholders) and non-controlling shareholders (minority shareholders). Using a unique hand-collected sample, this study tests the largest 350 UK firms for three years from 2005 to 2007, and shows that firms with effective audit committees have less earnings management. This study also documents that the monitoring effectiveness of audit committees is moderated in firms with high blockholder ownership. The results are not sensitive to the endogeneity test and hold for alternative specifications of both dependent and independent variables. Overall, these findings suggest that audit committees are ineffective in mitigating the majority-minority conflict compared to their effectiveness in reducing owners-managers conflicts. These conclusions, along with some recent similar evidence (e.g., Rose, 2009 and Guthrie and Sokolowsky, 2010), may raise doubts about the monitoring role of blockholders asserted by agency theorists and widely accepted in corporate governance literature.

scholarly journals Audit Committee and Earnings Management: The Role of Gender

2020 ◽  
Vol 23 (3) ◽  
pp. 379
Author(s):  
Widya. A. Sudarman, Widi Hidayat
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Audit Committee ◽  
Stock Exchange ◽  
Risk Averse ◽  
Gender Theory ◽  
Reporting Process ◽  
Selection Of

This study has a purpose to investigate the effect of committee audit on earnings management. Using a sampel of companies companies listed in Indonesia Stock Exchange (IDX) 2013-2017. Results of this study shows that gender of audit committee significantly effect earnings management, it explains that female on audit committee are more careful and allow for discretion in terms of financial reporting. The results explain gender theory that women are more risk averse and ethical than men. This research provides new insights for management so that they can consider gender in the selection of committee audit to be appointed by the company with regard to the financial reporting process.

scholarly journals Corporate Governance Practices In Selected Indian Financial Institutions

2012 ◽  
Vol 5 ◽  
Author(s):  
Suman Kalyan Chaudhury ◽  
Sanjay Kanti Das ◽  
Devi Prasad Mishra
Keyword(s):  
Corporate Governance ◽  
Board Of Directors ◽  
Financial Institutions ◽  
Financial Reporting ◽  
Vital Role ◽  
Key Factors ◽  
Additional Information ◽  
Governance Practices ◽  
Increasing Demand

It has been realized that Corporate Governance is vital for better management of any organization. Financial reporting and disclosure of any information are the key factors of corporate governance. Financial Institutions are no exceptions and there has been increasing demand for transparency in functioning of these Institutions in view of several scams.In this paper a modest effort is made to discuss the reporting pattern of India’s twelve financial institutions namely SBI, IDBI, SIDBI, IFCI, NABARD, PNB, UBI, BOB, BOI, KMB, NHB and HDFC. Top Six commercial banks namely (SBI, BOB, PNB, KMB UBI & BOI), six developments banks viz. SIDBI, IFCI, HFDC, IDBI, NHB, and NABARD  are selected under study .The rationale for selection of these institutes is that being incorporated organizations, they should have same Corporate Governance standards. In view of transparency in functioning, the role of different Committees has a vital role to play. Six parameters have been chosen for comparison of various corporate governance practices in all these twelve financial institutions namely, Company’s philosophy on Corporate Governance, Formation of Board of Directors, Composition of Board of Directors, Particulars of Director’s, Organizational Committees, and Additional Information supplied in CG report or in the Annual report. 

scholarly journals The Moderating Effect of Gender on Audit Committee Attributes and Earnings Management

2020 ◽  
Vol 7 (3) ◽  
pp. 48
Author(s):  
Usman Abbas
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Audit Committee ◽  
Stock Exchange ◽  
Securities And Exchange Commission ◽  
Moderating Effect ◽  
Ex Post ◽  
Ex Post Facto ◽  
Regulatory Bodies ◽  
The Impact

There exist a number of studies that have been conducted on the influence of audit committee attributes on earnings management but no attention has been given to the moderating effect of gender on audit committee attributes and earnings management. The main objective of this study was to examine the moderating effect of gender on the impact of audit committee attributes on earnings management of listed Agricultural companies in Nigeria for a period of six years (2012-2017). The study used ex-post facto and correlational research designs. The population of the study was the five (5) Agricultural companies in Nigeria listed on the Nigerian Stock Exchange as of 31st December 2017 and all the companies were used as a sample of the study. The study used a panel of multiple regression techniques for data analysis. It was found that gender has a strong and significant influence on the impact of audit committee attributes on earnings management of listed Agricultural companies in Nigeria. It was recommended that the audit committee of companies in Nigeria should comprise of at least 40% of women. Regulatory bodies concerned in Nigeria like Securities and Exchange Commission, Nigerian Stock Exchange and Financial Reporting Council should clearly state the composition of audit committee members and increase the number to ten where women should form 40% of the members of the committee and a woman with financial knowledge should be made the chairperson of the committee since women have shown a significant level of commitment to their responsibilities and contribute in reducing earnings manipulation.

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