Accrual Accounting and Earnings Management：权责发生制会计与盈余管理.ppt

Paul Zarowin Accrual Accounting and Earnings Management RCJ Chapters 1, 2(48-52), 3(126-132), 7(357-359) Key Issues Accrual accounting Managers’ incentives and reporting abuses Example: Revenue recognition How earnings are managed Accrual Accounting Recognizes the financial benefits and obligations accruing to an enterprise over the reporting period - regardless of cash inflows and outflows. Objective: Better indication of performance than current cash receipts and payments. Accrual Accounting: Characteristics subjectivity assumptions discretion incentives Earnings Management The reporting discretion inherent in accrual accounting can be opportunistically used by managers. Earnings Management (cont’d) Why allow reporting discretion? Earnings Management (cont’d) Important to understand: More often the problem is not the flexibility of the reporting rules, but the fact that the watchdogs are not doing their job!!! Audit failure Poor corporate governance Shareholder involvement SEC enforcement Common Earnings Management Practices Shifting income between periods: Common Earnings Management Practices (cont’d) Classification of gains and losses: Classifying one-time gains as earnings from continuing operations Classifying losses from continuing operations as one-time items Hiding Debt in unconsolidated subsidiaries Example: Enron Example of Scope of Manipulations and Incentives: Xerox Case Xerox sells/leases copy machines, and related service to be provided for several years after sale. Recorded service revenue at the time of sale. According to the SEC investigation, “accounting tricks” boosted pretax profit by 1.5 billion from 1997 through 2000. In November 1999, CFO told management: When accounting actions were stripped away, Xerox had essentially no growth through the late 1990s.” Q: Which of the 4 categories mentioned in slide #8 does Xerox case falls into? Without the accounting scheme the company would have missed Wall Streets consensus per-share earnings ta