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Unformatted text preview: earnings in years when they are
weak and to lower them in years when they are strong.
It’s very well known on Wall Street that investors prefer
steadily increasing earnings that consistently meet or
exceed financial analyst expectations. This stems from the
general economic principle that investors are risk averse.
In financial terms, risk aversion is associated with earnings
volatility. Cookie Jar and Big Bath
Accounting Cookie Jar Accounting One type of earnings management
and earnings manipulation. The practice treats the balance sheet as a
cookie jar: In good years, the company stores cookies (reserves) in the
cookie jar (the balance sheet) so that it can take them out and eat them
(place them on the income statement) when management is hungry
(needs extra income to look good).
(needs Big-Bath Accounting When a company makes a large oneWhen
time write off, it is said to take a big bath to improve future earnings.
Many companies take a big bath (often in the form of restructuring or
inventory write-downs) when earnings performance is already poor.
inventory Earnings Management Red Flags
Aggressive revenue recognition policies Hockey stick pattern near end of quarter Frequent “non-recurring” charges Changes to reserves, depreciation, etc. Related party transactions Complex financial products Unsupported top-side journal entries Underfunded defined benefit pension plans Unreasonable management compensation
32 A Thin Line
There certainly is a thin line between legal
earnings management and abusive earnings
management. Where does a company cross
the line between criminal behavior and merely
conduct that is beneficial to the organization? Chapter 3 Forensic and Investigative Accounting 33...
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This document was uploaded on 01/21/2014.
- Spring '14