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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 decreasing. Managers presumably perceive the risks and costs of detection to be higher than the benefits...

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