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Earnings management berat başat
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- 2. Definitions Methods Accounting Choices Reasons Detection andPrevention An opposing view Survey Final Notes
- 3. EARNINGS Bottom Line orNet Income It shows value added activities The value of a company’s stock = the present value of its future earnings
- 4. EARNINGS MANAGEMENT - Reasonableand legal management decision making and reporting intended to achieve stable and predictable financial results. - not to be confused with illegal activities (Cooking the books)
- 5. Definition given byKamal Naser : Creative accounting is the transformation of financial accounting figures from what they actually are to what preparers desire by taking advantage of the existing rules and/or ignoring some or all of them.
- 6. The definition ofearnings management does not rely on any particular item in the income statement. Earnings management can also occur in supplementary disclosures and may target financial ratios instead of earnings.
- 7. OTHER NAMES - Account hocus-pocus - Financial statement management - The numbers game - Aggressive accounting - Juggling the books - Financial Statement Manipulation - Accounting Magic - Borrowing income from the future - Banking income for the future - Window Dressing
- 8. METHODS 1. Choosing betweendifferent accounting methods 2. By estimation, judgement and prediction 3. Artificial transactions 4. Timing of genuine transactions
- 9. ACCOUNTING CHOICES Accounting choicesshould be made within the framework of GAAP. Everyday accounting choice may be either legal or illegal There is no clear posted limit beyond which a choice is obviously illegal
- 10. EXAMPLE Estimation of warrrantycost Revenue : $30.00 Warranty Expense : (2.75) Income : $27.25 Past five years: ranged from $2.50 to $2.80 $2.50 and $2.25 would be justified, but $1.25 would be crossing the line to financial fraud.
- 11. Fraud “the intentional, deliberatemisstatement or omission of material facts, or accounting data, which is misleading and, when considered with all the information made available, would cause the reader to change or alter his or her judgement or decision.” Earnings management is at the legal end of a continuum. Financial fraud is at the illegal end. GAAP may also be violated by “overly aggressive accounting”
- 12. The Earnings Management– Fraud Continuum We assume that there is evidence that quality control improvements could lower warranty costs to $2.25
- 13. Now we assumethat there is absolutely no evidence that quality control changes can lower future warranty costs under the historical $2.50 - $2.80 range. The $2.25 figure is now “overly aggresive” and beyond the bounds of GAAP.
- 14. REASONS 1- Income smoothing Reportinga steady growth in profit rather than to show volatile profits Making unnecessarily high provisions for liabilities and against asset values in good years
- 15. It is ameasure against the 'short-termism' Avoids raising expectations so high in good years 'big bath' accounting
- 16. 2- Manipulating profitto tie in to forecasts 3- Maintain or boost the share price - by reducing the apparent levels of borrowing - makes company appear subject to less risk - by creating the appearance of a good profit trend - to raise capital from new share issues - offer their own shares in takeover bids - resist takeover by other companies
- 17. 4- Delaying the releaseof information for the market Enhancing opportunity to benefit from inside knowledge Companies are subject to various forms of contractual rights, obligations and constraints Example
- 18. HOW IS EARNINGSM DETECTED? By looking at the Revenue Recognition - Read the footnotes - Look for the ways in which companies recognize their revenues - Is there any recent changes in the policies?
- 19. Delivering the product/ performing the service - try to find details in the notes to the financial statements
- 20. By monitoring AccountsReceivable - Follows customers who buy on credit - Compare the turnover ratio - Check the percentage rate of change
- 21. By Checking theCapacity - Revenue per employee - Revenue per dollar value of property, plant, and equipment - Revenue per dollar value of total assets
- 22. HOW IS EM DETECTED? BY CASH FLOWS Recent academic research found that we could detect accounting tricks by comparing net income to operating cash flow. But the occurrence of rising earnings combined with falling cash flow doesn't necessarily imply accounting tricks.
- 23. HOW TO PREVENT? 1. Focus on cash flow rather than income numbers 2. Put more than one person in charge of the accounting 3. Don’t let investors and partners mix company business with personal investments 4. Have an independent auditor go over the statements
- 24. AN OPPOSING VIEW Evenwhen earnings management conceals information, it can still be beneficial to shareholders. Arya, Glover, and Sunder state: « A managed earnings stream can convey more information than an unmanaged earnings stream. A smooth car ride is not only comfortable, but it also reassures the passenger about the driver’s expertise.» 24
- 25. Two Surveys onCreative Accounting A substantial minority in each country takes a tolerant view of creative accounting. More optimism in Spain on resolving the problem.
- 26. FINAL NOTES Creative accountingoffers a challenge to the accounting profession. Accountants need to be aware of the scope for both abuse of accounting policy choice and manipulation of transactions. The problem is an international one, with accounting policy choice being a particular problem in the Anglo- American tradition and transaction manipulation a particular problem in the continental European tradition.