1Motivations for earnings management
Remunerations
Job security
Avoid violating debt covenants – interest cover and equity
Analysts expectations and predictions
Impending acquisition/merger – IPO
Avoid volatility in reported earnings to look more stable. Reduces investors perception of risk.
Examples
Tesco
Bt Italia
World com
Enron scandal
Arthur Anderson
- Methods of earnings management
Cosmetic – no cash flow affect increase and decrease by manipulating provision for doubtful debts and depreciation method delaying asset impairment adjusting inventory valuation
Real- advertising repairs to save money.
- Mechanisms for constraining earnings
Board composition
Board size – inefficiency if too large
Board expertise – financial knowledge
Independent directors
Duality – CEO chairman and managing director
External auditors
Gender composition. More women more ethical