盈利质量和盈余管理英文版Document 19页.docx

盈利质量和盈余管理英文版Document 19页.docx

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盈利质量和盈余管理英文版Document19页

EarningsManagementandEarningsQuality

1.WhatisEarningsManagement?

（BryanHall’sWebpage）

Earningsmanagementisdefinedbyaccountingliteratureas “distortingtheapplicationofgenerallyacceptedaccountingprinciples.”  ArthurLevitt,theoldSECChairman,definedearningsmanagementas“practicesbywhichearningsreportsreflectthedesiresofmanagementratherthantheunderlyingfinancialperformanceofthecompany.” 

Earningsmanagementisoftendefinedastheplannedtimingofrevenues,expenses,gainsandlossestosmoothoutbumpsinearnings.Inmostcases,earningsmanagementisusedtoincreaseincomeinthecurrentyearattheexpenseofincomeinfutureyears.Forexample,companiesprematurelyrecognizesalesbeforetheyarecompleteinordertoboostearnings.Earningsmanagementcanalsobeusedtodecreasecurrentearningsinordertoincreaseincomeinthefuture.Theclassiccaseistheuseof"cookiejar"reserves,whichareestablished,byusingunrealisticassumptionstoestimateliabilitiesforsuchitemsassalesreturns,loanlosses,andwarrantyreturns.

Managersengageinincomesmoothingactivitiesbecausetheyknowthatvolatileearningsstreamstypicallyleadtolowermarketvaluations.Manysuccessfulmanagementteamsbelievethatthestrategictimingofinvestments,sales,expenditures,andfinancingdecisionsisanimportantandnecessarystrategyformanagerscommittedtomaximizingshareholdervalue.

Investorsaredissatisfiedwiththemanagementofearnings;however,investorsbecomeenragedwhenquarterlyorannualearningsforecastarenotmetbyfirms.  Therefore,investorsandthepublicviewminorearningsmanagementasacceptableandaneverydaybusinesspractice.  Inresponsetopubliccomplaintsandconcernforearningsmanagement,theSEChasissuedbulletinstohelppreventearningsmanagement.

2.ThePublicPerceptionofEarningsManagement

Earningsmanagementhasanegativeeffectonthequalityofearningsifitdistortstheinformationinawaythatitlessusefulforpredictingfuturecashflows.WithintheConceptualFramework,usefulinformationisbothrelevantandreliable.However,earningsmanagementreducesthereliabilityofincome,becausetheincomemeasureisbiased（upordown）and/orthereportedincomethatisnotrepresentationallyfaithfultothatwhichitissupposedtoreport（e.g.,volatileearningsaremadetolookmoresmooth）.

Thetermqualityofearningsreferstothecredibilityoftheearningsnumberreported.Companiesthatuseliberalaccountingpoliciesreporthigherincomenumbersintheshort-run.Insuchcases,wesaythatthequalityofearningsislow.Similarlyifanonrecurringgainincreasesincome,butthegainisobviouslynotsustainable,thenthequalityofearningsisconsideredlow.

Forthemarketstoworkefficiently,itisvitalthatinvestorsbeabletotrusttheearningsnumbersofthecompaniesinwhichtheyhavechosentoinvesttheircapital. Recentstudieshaveshownthattheinvestingpublicbelievesthattheoccurrenceofearningsmanagementisbothwidespreadandpervasiveinthefinancialstatementsofcorporationsworldwide. However,itisinterestingtonotethattheinvestingpublicdoesnotnecessarilyviewminorearningsmanagementasunethical,butinfactasacommonandnecessarypracticeintheeverydaybusinessworld. Itisonlywhentheimpactofearningsmanagementisgreatenoughtoaffecttheinvestors’portfoliothattheyfeelfraudhasbeencommitted.

3.TheImpactofEarningsManagement

Publicperceptionaboutthewidespreadoccurrenceofearningsmanagementisaffectingthepublic’sconfidenceinexternalfinancialreporting.Thepracticeof earningsmanagementdamagestheperceivedqualityofreportedearningsovertheentiremarket,resultinginthebeliefthatreportedearningsdonotreflecteconomicreality.Investorsrelyonfinancialinformationprovidedbythecompanytomaketheirinvestmentdecisions,andwheninvestorsbelievetheyarebeinggivenmeaninglessinformationtheybecomewaryoftrustingthecompaniestheyhaveinvestedin. Investors’apprehensionwilleventuallyleadtounnecessarystockpricefluctuation.Asinvestorslosefaithinreportedearnings,theyareforcedintoaguessinggameconcerningtheactualfinancialpositionofacompany. Thisuncertaintyultimatelyhasthepotentialtounderminetheefficientflowofcapitaltherebydamagingthemarketsasawhole.

4.IncentivestoManageEarning

A.EXTERNALFORCES

•AnalystForecasts-Companiesareunderextremepressuretomeetanalysts’earningsestimatesinordertopreventlargedropsintheirstockprice.

•Debtmarketsandcontractualobligations-Companiesdependonachievingcertainearningsfigurestoobtainaccesstodebtmarkets,oreventomeettheircurrentdebtcovenantsandothercontractualobligations.

•Competition-Thereispressureinhighlycompetitiveindustriestostayatthetopoftheindustryintermsofrevenueormarketshare. Companiesmaywanttomanagethesefigurestostayabovecompetitors.

B.INTERNALFACTORS

•Potentialmergers-Ifthecompanyishopingtoenteramerge,astrongfinancialpositionwillmakeitlookmuchmoreattractivetoothercompanies.

•ManagementCompensation-Stockoptionandbonusprogramsthataretiedtoearningsperformancewillprovideincentiveformanagerstomanipulateearningsnumberstoboosttheirowncompensation.

•Planningandbudgets-Sometimescompanieswillestablishunrealisticplansandbudgetstopushmanagerstooverachieve. Thiscanprovidepressureformanagementtoboostearningstomeetthecompany’sownexpectations.

•Unlawfultransactions-Somecompaniesevenuseearningsmanagementtocoveruptheirownunlawfultransactionssuchasembezzlement,fraud,misappropriation,andbribery.

C.PERSONALFACTORS

•Personalbonuses-Somecompensationpoliciesareheavilyweightedtowardsincentives,andindividualshopetoreceiveabonusbasedontheirgoodperformance.

•Promotionsandjobretention-Fudgingnumberstomakeperformancelookbettermayleadtopersonalpromotions,orevenhelptoretainanemployee’scurrentjob.

5.SECResponsetoEarningsManagement

Recently,severalstaffaccountingbulletinsconcerningearningsmanagementwerereleasedbytheSECandmanymoresuchregulationshavebeenpromisedinthefuture. ThesebulletinsandpromisesofmoretocomearepartlytheresultofformerSECchairmanArthurLevitt’scrusadetoeradicatetheproblemofearningsmanagementinUnitedStatescompanies. Recentpublicityofhighprofileearningsmanagementfromsomeofthenation’smostelitecompanies,combinedwithasaggingeconomyhaveheightenedinvestor’sfearsabouttheoccurrenceofearningsmanagement. Throughoutthelastfewyearsofthechairman’stermMr.Levittwidelypublicizedhisbeliefsaboutthepervasivenessofearningsmanagementandhisintentiontoaddresstheseissues.

 ThiscrusaderesultedinatorrentofstaffaccountingbulletinsbeginningwiththeissuanceofSAB99regardingMaterialityinAugustof1999. Thisbulletinattemptstoclarifyanauditor’sappropriatescopeofmaterialitywhileconductinganaudit. Sinceafavoritepracticeofcorruptmanagementistojustifyearningsmanagementbyclaimingitisimmaterial,thisstatementisparticularlyhelpfultocurrentandfutureauditors. SAB100wasreleasedinNovemberof1999inanattempttoeradicatethecommonearningsmanagementpracticeoftakinga“bigbath”throughtheuseofrestructuringandimpairmentcharges. AnotherfavoritecomponentofearningsmanagementwasaddressedinMarchof2000whenSAB101AconcerningRevenueRecognitionwasreleased. Themostcommonformofearningsmanagementistheintentionalmanipulationofrevenuerecognition,thereforethisstatementanditslatercounterpartSAB101Barealsoveryhelpfultoanauditorattemptingtosnuffoutearningsmanagement. Finally,Julyof2001sawtheissuanceofSAB102concerningLoanLossAllowances,anotherpreferredtoolofearningsmanagement.

Thesebulletinswillnotcompletelypreventearningsmanagement,andthereforetheywillnotbethelastoftheirkind. Earningsmanagementwillremainanimportantproblemfacingthemarketsaslongasthereispressureoncompaniesandindividualmanagerstoperform.However,carefulauditingproceduresandcontinuingattentivenessbytheSECandotherregulatorybodieswillhelpreducetheoccurrenceofearningsmanagementintothefuture.

6.TypesofEarningsManagementandManipulation（byScottMcGregor）

a."Cookie-jar"Reserves

Theaccrualofexpensesistoreflecttheperiodinwhichtheexpensewasincurred.Forexample,ifafirmhiresaconsultanttoperformaparticularactivity,itshouldreflecttheexpenserelatedtothatactivityintheperiodinwhichitisincurred,notwhenthebillispaidorinvoicereceived.Inmanycases,theaccrualofexpenses,orreservesinparticularindustriessuchasinsuranceandbanking,arebasedonestimates.Assuch,theestimateshavevaryingdegreesofaccuracy.Duringtimesofstrongearnings,thefirmestablishesadditionalexpenseaccrualsandsubsequentlyreducestheliabilitytogenerateearningswhenneededinthefuture-pullinga"cookiefromthejar".

b.Capitalizationpractices-Intangibleassets,softwarecapitalization,researchanddevelopment.

In1997,companieswereallowedtocapitalizethecostsofinternallydevelopedsoftwareandamortizeitovertheusefullife,generallythreetofiveyears.Capitalizationistorepresentthedevelopmentcosts.Thecapitalizationprocessofcompanieshasthepotentialformanipulationbecausetheseassetsareoftenintangibleandbasedonjudgment.Afirmmayallocatemoreexpensestoaprojectthatcanbecap