This website uses cookies to ensure you have the best experience. Learn more

Earnings Management Essay

1083 words - 5 pages

Earnings Management
Eli Mudrick
Professor David Heier, CPA, MBA
11 June 2014

Earning Management
This paper looks at the speech entitles “The ‘Numbers Game’” that SEC chairman Arthur Levitt delivered at the NYU Center for Law and Business regarding earnings management in 1998. While companies use many techniques and illusions to improve their numbers, this paper will only look at three: “Cookie-Jar” Reserves, “Big Bath” Charges, and Revenue Recognition. After discussing and using real world examples of these techniques, this paper will examine ethical questions related to the selection of audit committee members such as qualifications and independence.
Cookie Jar Reserves
Cookie ...view middle of the document...

Big Bath Charges
Big bath charges occur when a company already experiencing a bad year will take a one-time charge to lower earnings even further in the current period in order to be offset by better earnings the next year. They classify this as additional restructuring costs (Gaffney). When FASB released SFAS No. 142 in 2002, which no longer allowed companies to amortize goodwill, they gave way to bath restructuring allowing companies to write-down their intangibles. Companies took advantage of this by overstating these restructuring charges (Jordan).
In 2007, a year before Levitt’s Speech, Meryll Lynch, Citigroup, and GM all were suspected to have incurred massive big bath charges. Citigroup wrote down over $8 billion in a single quarter, and GM wrote down over $39 billion again in a single quarter. Both of these are staggering amounts of money. The trouble is that it is difficult to prove that any fraud occurred in both of these situations (The Accounting).
Revenue Recognition
Aggressive or untimely Revenue recognition is arguably the most common of the three discussed earnings management techniques and it goes directly against both matching, revenue recognition, and the time period assumption. Since there are so many times that companies recognize revenue, there are a myriad of opportunities to fudge the numbers. The SEC SAB No. 104 illustrate many of these situations. The basic concept behind this is to record sales early in order to meet estimates in the current period, or to record contractual revenue with very liberal estimates (Gaffney).
A real-world example of this is a company called Sunbeam, who’s most famous brand is Mr. Coffee. In late 2000 the SEC charged them with early revenue recognition related to sales promotions they offered retailers in 1997. In 1998, their CEO was fired, and then in 2000, they received the charges (McGregor).
Audit Committee Independence
Concluding his speech, Levitt discusses the audit committee by comparing and contrasting two scenarios: a vastly unqualified committee which meets twice a year, and a qualified on who meets 12 times a year. He makes the point that an audit committee should have no ties to the company and should all be well versed in financial management (Levitt).
Levitt’s position makes perfect sense. Without independence, the audit committee will choose an auditor which will best serve the interests of the company rather than that of the end use of the...

Other assignments on Earnings Management

Fasb Asc Essay

250 words - 1 page relative to peers), a change in the market for an entity’s products or services, or a regulatory or political development c. Cost factors such as increases in raw materials, labor, or other costs that have a negative effect on earnings and cash flows d. Overall financial performance such as negative or declining cash flows or a decline in actual or planned revenue or earnings compared with actual and projected results of relevant prior periods

Ddddd Essay

6183 words - 25 pages Dividend Payouts and consider it less risky than capital gain. Allen & Rachim (1996) found no relationship between the dividend yield and stock market price even after studying 173 Proceedings of 2nd International Conference on Business Management (ISBN: 978-969-9368-06-6) Effect Of Dividends On Stock Prices 6 Australian listed stocks but it show positive relation between stock prices and size, earnings and leverage and negative relation

Aaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaa

456 words - 2 pages liabilities =TK 862,151,015-TK 447,752,592 =TK 414,398,423 4) Cash conversion cycle=Days Sales Outstanding+ days in inventory-average payment period =80.18 Days+408.73 Days-24.25 Days =464.66 days Asset management ratio 1) Inventory turnover ratio=cost of goods sold/stock of goods sold

Conservatism In Accounting

5452 words - 22 pages four conservatism explanations. However, some of the evidence is also consistent with two explanations that do not imply conservatism. One of those explanations is that management understates assets by taking excessive charges (such as restructuring charges) or excessive write-offs in order to overstate earnings in the future (see Hanna, 2002). The other is that management elects to abandon operations that are not profitable (Hayn, 1995

Galaxy Sports Inc

815 words - 4 pages consumers during difficult economic times. Galaxy’s common share price in quarter two fell yet again to $45.25. During the third quarter Galaxy’s earnings were significantly below expectations and management did not perform an interim goodwill impairment test. Galaxy’s common share price during quarter three fell even further to $31.50. At the 2012 year-end, Galaxy decided to carry over prior year’s Fitness Equipment and Hockey Equipment fair value and

Forensic Accounting

1320 words - 6 pages is also the excuse that the fraudsters if employed are underpaid and as such, they need to steal the money so that they can meet all their expenses that far out way their income. Earnings Management Earnings management entails the use of accounting techniques to produce financial reports for the purpose of meeting the financial regulations by SEC. The result of this practice is the likelihood of painting an overly positive picture of a

Case Study: Krispy Kreme Doughnuts, Inc

623 words - 3 pages Case Study: Krispy Kreme Doughnuts, Inc. Problem The problem in this case deals with the loss in value of Krispy Kreme Doughnuts’ stock. Was the main reason for the fall in stock price due to article posted in the Wall Street Journal about the SEC investigation? Were there deeper issues within the company that caused the loss in earnings per share? Analysis In April of 2000, the CEO of Krispy Kreme Doughnuts took the company public and

Dfgdfgdfg

9549 words - 39 pages and prepare income statement, retained earnings statement, and statement of financial position. Prepare income statement, retained earnings statement, and statement of financial position. Analyze transactions and prepare financial statements. Determine financial statement amounts and prepare retained earnings statement. Analyze transactions and compute net income. Analyze transactions and prepare income statement, retained earnings statement, and

Short Answers Of Finance

1031 words - 5 pages a valuation standpoint, a very widely used ratio is the price to earnings ratio (P/E). This is the ratio of the market cap to the last year’s reported earnings of the company. There is another very widely used ratio called Enterprise Value by EBITDA. The Enterprise Value (EV) of a company is total debt plus the market capitalization of the company minus cash and equivalents with the company. Think of it as the price that a private buyer will

Jinsu

286 words - 2 pages . The British Accounting Review, 29(2), 155-179. Haldeman, R. G. (2006). Fact, fiction, and fair value accounting at Enron. CPA JOURNAL, 76(11), 14. Markarian, G., Pozza, L., & Prencipe, A. (2008). Capitalization of R&D costs and earnings management: Evidence from Italian listed companies. The International Journal of Accounting, 43(3), 246-267. Wyatt, A. (2005). Accounting recognition of intangible assets: theory and evidence on economic determinants. The accounting review, 80(3), 967-1003.

Ben And Jerry's

1830 words - 8 pages % of its pre-tax earnings to various social foundations In Million $ 1999 1998 1997 1996 1995 1994 Pre Tax Earnings 8.9 9.1 6.4 6.4 9.8 2.8 Charity contribution 0.668 0.683 0.48 0.48 0.735 0.21  The company supports causes such as Greenpeace International and Vietnam Veterans  Expresses Customer Appreciation with an annual free cone day at all of its scoop shops  Social Value led Marketing – Development of an ice cream flavour to

Similar Documents

The Earnings Management Issue Of Worldcom Case Study Report

2231 words - 9 pages Management 3.1 Definition of Earnings Management A commonly acknowledged definition of earning management by Healy and Wahlen (1999) demonstrates that managers implement personal judgement in financial reporting and transactions to manipulate financial reports for misleading some investors about a company’s financial performance or influencing contractual outcomes that reply on the numbers. Based on several researches, Lawrence (2009

Earning Management Essay

1173 words - 5 pages Earning management is good or not? Introdcution This essay is to examine whether earning management is it good or bad. Though there is so many debate about whether it should be accepted to be good rather than bad, however, this essay will explain the both side of earnings management. Earnings management reduces the quality of financial reporting, it can interfere with the resource allocation in the economy and can bring adverse consequences

Business Accounting Formulas Essay

302 words - 2 pages | |EFFICIENCY |Fixed assets turnover |Sales / Fixed assets at NBV (x) | | | | | |OR ASSET MANAGEMENT |Total assets turnover |Sales / Total assets at NBV (x

Healthsouth Summary Essay

362 words - 2 pages company affects the quality of the bank’s research reports on the company; whether the executive compensation that overly relies on company’s earnings provides an incentive for committing such fraud; whether a strong leader can silence all voices of reason in an organization. This case can be used for teaching corporate governance, business ethics, corporate fraud, and corporate social responsibilities. It highlights the pitfalls in corporate management when the various actors—directors, auditors, investment bankers, company executives—work solely in the interest of a few and ignore the interests of other stakeholders.