Accounting Essay

4256 WordsFeb 5, 201418 Pages
Accrual Based Earnings Management, Real Transactions Manipulation and Expectations Management: U.S. and International Evidence Dr. Sherry Fang Li, Rider University, U.S.A Dr. Evelyn McDowell, Rider University, U.S.A Dr. Erin A. Moore, Westfield State College, U.S.A ABSTRACT Managers face a number of incentives to report earnings that meet or exceed the consensus analyst forecast. If a firm’s results of operations are not sufficient to meet the analysts’ expectations for a given period, the manager may 1) use accrual based earnings management techniques or 2) structure actual transactions to achieve the desired financial reporting result. Additionally, the manager may attempt to guide the analyst’s forecast down to a “beatable level,” a phenomenon referred to as “expectations management.” This paper provides an overview of these three mechanisms and describes the interrelationships among them. Recent changes in the regulatory environment in the United States (e.g., Regulation Fair Disclosure and the Sarbanes Oxley Act) have changed managers’ use of these tools. This paper discusses these changes as well. Evidence of the existence of these practices in both the United States and in various countries throughout the world is discussed. Keywords: Accrual based earnings management, real transactions manipulation, expectations management INTRODUCTION It is well known that managers use accrual based earnings management techniques to provide flexibility within the accounting rules to report an earnings number that meets or beats the consensus analyst forecast. The market rewards firms that meet or exceed earnings expectations, and penalizes firms whose earnings fall short. In the years following the passage of the Sarbanes-Oxley Act of 2002, research shows that accrual based earnings management appears to be

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