财务会计理论(司可脱)文件11_scott_im_ch11

1、Chapter 11Earnings Management1Earnings Management (EM)DefinitionChoice of accounting policies to achieve some specific manager objectiveCan Also Include Management of Real VariablesR&D, advertising, maintenanceTiming of disposals2Earnings Management TechniquesRevenue RecognitionAccounting Policy Cha

2、ngeTiming of Adoption of New StandardsWriteoffs, Asset Sales, ProvisionsAccruals (Discretionary)Direct Charges to Retained Earnings3Patterns of EM BathIncome MinimizationIncome MaximizationIncome Smooth4Reasons For EMFinancial Reporting To meet investors earnings expectationsTo credibly communicate

3、inside information about earnings expectations (“Good EM)ContractualBonus Healy (1985)Debt covenant Sweeney (1994)Political Jones (1991)IPOs5Review of Arguments for “Good EMSecurities & Labour Market Argument Manager “foolish to report higher earnings than can be maintainedWhy? accruals reverseManag

4、er is best placed to know persistent earnings (inside information)Blocked communicationEM is credible way to release blocked, inside information6Review of Arguments for “Good EM, Contd.Contracting ArgumentTo give firm some flexibility in the face of rigid, incomplete contractsConcept of an incomplet

5、e contractContract rigidityContract violation is costly7“Bad EMFinancial Reporting PerspectiveHanna, (1999)Investors and analysts look to core earnings, ignoring extraordinary and non-recurring itemsImplies manager not penalized for non-core charges, such as writedowns, provisions for restructuringB

6、ut current non-core charges increase core earnings in future years, through lower amortization and absorption of future costs 8“Bad EM, Contd.Hanna, contd.As a result, managers tempted to “overdose on non-core charges, thereby putting earnings “in the bank (also called cookie jar accounting)Note sec

7、urities market reactionHanna found evidence that market uses frequency of such charges as proxy for their misuse-lower ERC when greater frequencyExample: Nortel, 2004 (text, Section 11.6.1)9“Bad EM, Concl.Contracting PerspectiveOpportunistic bonus maximizationHealy (1985)To avoid debt covenant viola

8、tionsDechow, Sloan, and Sweeney (1996)10Do Managers Accept Securities Market Efficiency?PerhapsPoor disclosure enables earnings management even if markets efficientPerhaps NotTheory and evidence that securities markets may not be fully efficientPro-forma earningsSchrand and Walther (2000)11Implicati

9、ons For AccountantsImproved DisclosureSarbanes-Oxley, 2002; CICA Handbook, Sections 1100 and 1400, 2003Reporting effects on core earnings of previous writeoffs12Earnings Management at General ElectricText, Chap. 11, Q. 9EM DevicesAssumed rate of return on pension fundsRestructuring chargesAcquisitio

10、ns, sales of divisionsConservative accounting practicesSales of leased aircraftAllocation of goodwill on purchase of subsidiaries13Earnings Management at General Electric, Contd.Reported Net Income (Millions)2004$16,5932003 15,0021002 14,1182001 13,6842000 12,7351999 10,7171998 9,2961997 8,2031996 7

11、,2801995 6,5731994 4,7261993 4,3151992 4,72514Earnings Management at General Electric, Concl.EM Devices Used In Harmony to Report Steadily Increasing EarningsSecurities Market Efficiency?Given complexity and diversity of GE, even analysts cannot understand whole company?“Good or “Bad EM at GE?If analysts cannot figure GE out, role for management to credibly reveal earnings expectations by EM15Earn