Lecture 6 Earnings Management

Lecture 6 Earnings Management - LECUTRE 6 EARNINGS...

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Click to edit Master subtitle style 9/13/11 LECUTRE 6 EARNINGS MANAGEMENT MCGR 211
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9/13/11 Agenda What is earnings Management How to detect earnings management Auditing Accounting Scandals
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9/13/11 Importance Earnings management has become a hot topic in the business world. Earnings management is linked to accounting scandals of some of the biggest companies Think Enron, WorldCom, Madoff…
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9/13/11 What is Earnings Management Accounting is not always black and white Remember that we said accounting standards need to be interpreted You often have choices for accounting policies Sometimes you will also be in a specific situation where there is no accounting guidance Earnings management occurs when
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9/13/11 What is Earnings Management Your are the CFO of a manufacturing company and you have a bonus of $500,000 if the net income of your company is $15,000,000 or higher. It is now the last week of December and your have net income of $14,900,000. You have just sold equipment to the government worth $1,000,000 with related costs of $850,000. Due to the holidays, you will deliver the equipment
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9/13/11 What is Earnings Management If you do, then you get your bonus. l Could find arguments to recognize now – contract signed, collectability not an issue (government), do not need to do a lot of extra work and services as equipment already built. If you don’t, then you and your employees do not get the bonus.
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9/13/11 What is Earnings Management After pleading guilty to defrauding his clients of billions, Bernie Madoff told investigators how he became a crook in the first place. Apparently, the Ponzi artist lamented, he'd suffered embarrassing losses with a European bank in the early '90s. Instead of confessing this to his clients and blemishing his reputation, Madoff began generating fake returns. Once he started, he explained, it was just too hard to stop. "I wish they caught me six years ago, eight years ago," he sighed.
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9/13/11 What is Earnings Management Management, BOD and Auditors are supposed to act in the best interest of the shareholders. However, often have own personal
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This note was uploaded on 09/12/2011 for the course MGCR 211 taught by Professor La rocca during the Fall '08 term at McGill.

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Lecture 6 Earnings Management - LECUTRE 6 EARNINGS...

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