Wednesday, September 25, 2013

Following the class discussion on September 24th concerning "cookie jar reserves", please read the attached article and comment.
Abusive Earnings Management and Early Warning Signs - The CPA Journal

1 comment:

  1. It is critical for investors and lenders to evaluate a company's earning ability. So accurate accouting information is valuable and necessary for inventors' decision making.
    However, a company's business activities can be affected by many factors like economic cycles, new legislations or other extraordinary events. Managers then tend to alter accounting reports misleading stakeholders about company's earning performance. "Earning management" is primarily to improper recognition of revenues, sometimes top managers associate with full or partial employees within companies to conceal those fraudulent accouting practices.

    There are about three types of companies that are likely to adopt an earnings management policy: companies where executive compensation is tied to earnings, publicly traded companies because they are under constant pressure to meet or beat analysts earnings forecasts, and companies getting ready for major debt financing or for an IPO (Initial Public Offering).

    SEC documents indicate the ways that a company may have "earnings management". Stock holders and investors should pay attention when there is warning signal.

    from Ran Ni-BC Intermediate Accounting