资源描述：
《Earnings Management and Earnings Quality英文版).doc》由会员上传分享，免费在线阅读，更多相关内容在行业资料-天天文库。
EarningsManagementandEarningsQuality1.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.ThePublicPerceptionofEarningsManagementEarningsmanagementhasanegativeeffectonthequalityofearningsifitdistortstheinformationinawaythatitlessusefulforpredictingfuturecashflows.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.TheImpactofEarningsManagementPublicperceptionaboutthewidespreadoccurrenceofearningsmanagementisaffectingthepublic’sconfidenceinexternalfinancialreporting.Thepracticeof earningsmanagementdamagestheperceivedqualityofreportedearningsovertheentiremarket,resultinginthebeliefthatreportedearningsdonotreflecteconomicreality.Investorsrelyonfinancialinformationprovidedbythecompanytomaketheirinvestmentdecisions,andwheninvestorsbelievetheyarebeinggivenmeaninglessinformationtheybecomewaryoftrustingthecompaniestheyhaveinvestedin. Investors’apprehensionwilleventuallyleadtounnecessarystockpricefluctuation.Asinvestorslosefaithinreportedearnings,theyareforcedintoaguessinggameconcerningtheactualfinancialpositionofacompany. Thisuncertaintyultimatelyhasthepotentialtounderminetheefficientflowofcapitaltherebydamagingthemarketsasawhole.4.IncentivestoManageEarningA.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.SECResponsetoEarningsManagementRecently,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"ReservesTheaccrualofexpensesistoreflecttheperiodinwhichtheexpensewasincurred.Forexample,ifafirmhiresaconsultanttoperformaparticularactivity,itshouldreflecttheexpenserelatedtothatactivityintheperiodinwhichitisincurred,notwhenthebillispaidorinvoicereceived.Inmanycases,theaccrualofexpenses,orreservesinparticularindustriessuchasinsuranceandbanking,arebasedonestimates.Assuch,theestimateshavevaryingdegreesofaccuracy.Duringtimesofstrongearnings,thefirmestablishesadditionalexpenseaccrualsandsubsequentlyreducestheliabilitytogenerateearningswhenneededinthefuture-pullinga"cookiefromthejar".b.Capitalizationpractices-Intangibleassets,softwarecapitalization,researchanddevelopment.In1997,companieswereallowedtocapitalizethecostsofinternallydevelopedsoftwareandamortizeitovertheusefullife,generallythreetofiveyears.Capitalizationistorepresentthedevelopmentcosts.Thecapitalizationprocessofcompanieshasthepotentialformanipulationbecausetheseassetsareoftenintangibleandbasedonjudgment.Afirmmayallocatemoreexpensestoaprojectthatcanbecapitalizedtoreducecurrentoperatingexpenses.c."Bigbath"one-timechargesUnusualornon-recurringchargeshavebecomeone-techniqueusedbyfirmstoescapethemazeofoveraggressiveaccountingpractices.Manybelieveandanecdotalevidencehasshownthatanalystsoverlooknon-recurringchargesbecausetheyarenotpartofthefirmsongoingoperationsoroperatingincome.Typicalnon-recurringchargesincludewritingdownassets,discontinuanceofanoperatingdivisionorproductlineandestablishingrestructuringreserves.Asdiscussedpreviously,firmspracticingearningsmanagementdepletetheeconomicearningsfromfutureperiods.Astheirabilitytosustainearningsgrowthdiminishes,theymayseekaneventthatcanbecharacterizedasone-timeeventand"overload"theexpensesattributabletothatevent.Theone-timechargemaybediscountedbyanalystsasnotbeingpartofoperatingearningswhilethestockpricedoesnotsuffertheconsequencesnormallyassociatedwithmissing earningstargets.Toprovideitselfwithmore"cookiejar"reservesormaskitspastsins,thefirmmaytakeotherwrite-offsorcreateotheraccrualsnotdirectlytiedtotheeventandattributethoseexpensestotheone-timeevent.AstudybyElliotandHanna(1996)reportedthatreportsoflarge,one-timeitemsincreaseddramaticallybetween1975and1994.In1975,lessthan5%ofcompaniesreportedalargenegativewrite-offcomparedto21%in1994.Theauthorsalsoshowedthatcompaniesthathadpreviouslyreportedsimilarwrite-offsweremorelikelytodoso.d.OperatingactivitiesManagersoftenhavetheabilitytomodifythetimingofeventssuchthattheaccountingsystemwillrecordthoseactivitiesintheperiodthatismostadvantageoustomanagement.Theactivitydoesnotalterthelong-termeconomicvalueofthetransaction,justthetimingandthus,comparabilityoffinancialstatements.Forexample,acompanycouldaccelerateitssalesanddeliveryprocesssuchthatitrecordssalesinDecemberthatnormallywouldhavebeenreportedinJanuary.Thus,thecompanyreportshigherfourthquartersales,revenueandprofits.Inthelong-term,thecompanywouldultimatelyreportthesamesalesandprofits;however,ithasinflateditsgrowthinthenearterm,andreducedprofitsinthefutureperiod.e.MergerandacquisitionactivitiesOnetypeofsignificanteventthatmaybeusedtomaskothercharge-offismergersandacquisitions.Inmostcases,thereissomeformofrestructuringinvolvedcreatingtheneedforalargeone-timechargealongwithothermerger-relatedexpenses.Theeventprovidestheacquirerwiththeopportunitytoestablishaccrualsforrestructuringthetransaction,possiblyattributemoreexpensethannecessaryforthetransaction.Thecompanymayalsoidentifycertainexpensesthatarerevaluedontheseller'sbalancesheet,increasinggoodwill.Iftheconservativevaluationsprovetobeexcessive,thecompanyisabletoreduceitsoperatingexpensesintheneartermbyreducingitsestimatefortheliability.Theadditionalgoodwillcreatedwouldbeamortizedoveralongperiodoftimeandnothaveasignificantimpactonneartermresults.Therearetwomethodsofaccountingformergersandacquisitions.Poolingofinterests("pooling")accountingandpurchaseaccounting.Poolingrecognizesthetransactionasamergerofequals,thusthetransactionisrecordedascompanyApluscompanyB.Purchaseaccountingtreatsthetransactionasapurchase.Thefairvalueofthepurchasedcompanyisassessedandcomparedtothepurchaseprice.Anyexcessorpremiumpaidabovethefairvalueoftheassetsisrecognizedasgoodwill.Goodwillisamortizedoveraperiodoftimenottoexceedfortyyears.1.Poolingoninterests AbrahamBrilloff,professoremeritusatBaruchCollege,inanarticleintheOctober23,2000issueofBarron'sentitled"PoolingandFooling"broughtattentiontotheuseofpoolingaccountingbyCiscoSystemstoinflateitsoperatingearnings.Ciscohasbeenanactiveacquirerpaying$16billionfortwelvecompaniesinfiscal2000alone,butthroughtheuseofpoolingaccounting,Ciscoonlyrecognizedonly$133millionincostinitscapitalaccountsforthesetransactions.Inaddition,fiveoftheacquisitionsweredeemed"tooimmaterial"torestatepriorperiodfinancialstatements.BrilloffcontendsthatCisco'searningsfor2000shouldhavebeenreducedby$2.5billionreducingthe$2.1billiongainintoa$.4billionloss.Ifacompanypaysapremiumtoacquireanotherfirm,thepremium,orgoodwill,isamortizedandreducesearningsgoingforward.Thus,companiesseektransactionsthatwillallowthemtousepoolingofinterests.Ithasbeencontendedthatadditionalpremiumshavebeenpaidininstanceswherepoolingofinterestswillbeallowed.CriticismofpoolingaccountinghasbeensignificantandtheFASBhasreactedbyannouncingtheeliminationofthemethod.However,theeffectivedatehasbeendelayedastheFASBhasreceivedstrongoppositionfromindustry.2.PurchaseaccountingandgoodwillUnderthepurchasemethodofaccountingforacquisitionsifthepricepaidbytheacquiringfirmexceedsthefairvalueofthecompanyacquired,thedifferenceisrecordedasanintangibleasset,goodwill.Goodwillisamortizedoverfutureperiods,thus,thecreationofgoodwillcausesfutureexpenses,thereforereducingreportedearnings.Iftheacquirerconservativelyvaluesassets(suchasprivateplacementorilliquidsecuritiesandrealestate)orliabilities(reserves,accruedliabilities),thecompanymaybeabletorecognizeadditionalearningsinthenearfutureasitestimatesbecomelessconservative.ProfessorBrilloffhasalsobeenacriticoftheaccountingpracticesofConseco,afinancialservicescompany.Mr.BrilloffcontendedthatConsecohadmanipulateditsearningsthroughitsacquisitionpractices.Insummary,hearguedthatConsecohadinflatedthelossorclaimreservesoftheinsuranceentitiesitacquiredandrecognizedacorrespondingassetofgoodwillatthetimeofacquisition.Itcouldthenreducethereservesovertheneartermtoinflateearningswhileamortizingthegoodwilloverasignificantlylongerperiodoftime.f.RevenueRecognitionThetimingoftherecognitionofrevenueisthemostlikelyareatotargetformanagementandmanipulation.Fromanoperationalstandpoint,firmscantakeaggressiveactionstoboostrevenuesandsalesinoneperiodthroughprovidingincentivestotheirsalesforce,utilize overtimetopushshipmentsoutthedoor.Theymayalsotakeaggressiveaccountingactionssuchassellingsecuritiesclassifiedheldforsalesrecognizegainsinincomeversusstockholdersequity,aggressiveinthetimingoftherecognitionofsalesoraggressiveintheapplicationofbroadorunclearaccountingguidance.g.ImmaterialmisapplicationofaccountingprinciplesMaterialityisaconceptthathasbeenunderfirefromtheSECduetoitsmisuse.Aspreviouslydiscussed.Errors,misstatementsandmisapplicationofaccountingprincipleshavebeenoverlookediftheyfellbelowthematerialitythreshold.Acompanymayknowinglymisstateearningsbyamountsthatfallbelowthematerialitythresholdbynotcorrectingknownerrorsorothermisstatements.Ifthepracticecontinuesforanumberofperiods,thebalancesheet(retainedearnings)maybecomesignificantlymisstated.h.Reserveone-timechargesTheuseofone-timecharges,establishedintheformofareserve,canbeusedtomanageearnings.Thecompanyconservativelyrecognizesaone-timechargeintheformofacontingencyreserveforapossiblefuturelossorfutureexpense.Theyanticipatethatanalystswilldiscountthechargesinceitisnotdeemedtobepartofoperatingincome.Overtime,thecompanychangesitsestimate(reduces)torecognizeadditionalearnings.7.Examplesofcasesofearningsmanipulationa.CendantCendant(AAER1272,06/14/00)Cendantwascreatedina1997"mergerofequals"betweenCUCInternationalandHFS.InApril1998,legacyHFSofficialslearnedthatpriortothemerger,CUCexecutiveshadengagedinaccountingirregularitiesthatinappropriatelyrecordedover$500millioninphonyprofits.TheaccountingirregularitiesatCUCwerewidespread,usedatleastfourearningsmanipulationtechniquesandinvolvedmorethan20employees.SECdocumentsassertthattheaccountingmanipulationsatCUCweredrivenbyseniormanagement'sdeterminationtomeetWallStreetanalyst'sexpectationsand"fueledbydisregardforanyobligationthattheearningsreportedneededtobe`real'."AccordingtotheSECdocuments,CUCmanagementmaintainedanannualschedulesettingforth"opportunities"thatwereavailabletoinflateoperatingincome,creatinga"cheatsheet"listingtheopportunitiesthatwouldbeusedinthecomingyearandtheamountsthatwouldbeneededfromeachopportunity. Attheendofeachfiscalquarter,financialreportingpersonnelatCUCheadquarterspreparedpreliminaryconsolidatedquarterlyfinancialresults.CUCmanagementthendirectedtopsideadjustmentsconsistingofsimplyaddingordeductingspecificlump-sumamountstoorfromreportedrevenuesandexpensesuntilreportedresultsmetorexceededpublishedearningsexpectations.Onceincomewasadjusted,CUCseniormanagementwouldmakeadditionalalterationsamongspecificlineitemstoensurethatreportedexpensecategoriesweresetatapproximatelythesamepercentageofrevenuesasinpreviousquarters.AccordingtotheSEC,thechangesdirectedbymanagementwere"adeliberate,top-downprocessof`reverseengineering,'virtuallydivorcedfromwhateverfiscalandbusinessrealitiesactuallyhadtranspiredinthatquarteratCUC"and,therefore,"thequarterlyreportsthatCUCfiledwiththeCommissionandreleasedtoinvestorswereequallydivorcedfromthoserealities.!"SincetheCUCincomewasaddedinquarterlytop-sideadjustmentsduringtheconsolidationprocessanddidnotappearindivision'sbooks,CUCmanagementusedunsupportedpost-closingjournalentriescarryingeffectivedatesspreadretroactivelythroughouttheyeartoconcealtheirearningsmanipulationsschemesfromoutsideauditors.Tomaketheadjustmentslessnoticeable,theunsupportedentriesweredisaggregatedintosmallercomponentsandintentionallycreatedinoddamounts.Intheearlieryearsofthemanipulationschemes,managementreliedprimarilyonmanipulatingtherecognitionofmembershipsalesrevenueandassociatedliabilitiesarisingfromallowancesforrejects,cancellationsandobligationstopaycommissions.Seniormanagementwouldreviewprojectedmembershipsalesfigures,calculateadditionalamountsneededtoinflateincometodesiredlevelsandgenerateoperatingresultsatpredeterminedamounts.CUCalsomanipulatedincomebypostingfictitiousentriestokeepmembershipsalesrejectsoffbooks,intentionallyunderstatingmembershipcancellationreserves,and,occasionally,simplyreversingthecancellationreserveorthecommissionspayableliabilitydirectlyintorevenueoroperatingexpenseaccounts.Forexample,infiscal1997,CUCmanagersdirectedpost-closingentriesmoving$9.12millionfromcommissionspayabledirectlytorevenue.CUCmanagementusedschedulesandotherdevicestosupportunderstatingcommissionspayable.SECdocumentsindicatethatbythemid-1990s,opportunitiesrelatedtoCUC'smembershipsalescouldnolongersustainthemanipulationschemes.Accordingly,inthemid-1990smanagementdecidedtokeeprevenue-relatedopportunitiesatconstantpercentagelevelsanduseopportunitiesrelatedtoacquisitionandpurchasereservestokeepincomeinlinewithever-increasinggoals.In1996,CUCestablishedmergerreservesinconnectionwithseveralnewacquisitions.AccordingtoSECdocuments,CUC'saccountingforliabilitiesrelatedtoitsbusinesscombinationswentfarbeyondwhatGAAPpermitted.CUCmanagersarbitrarilydeterminedthe amountsthatCUCwouldreserveforliabilities,attimessimplydoublingtheamountscalculatedasCUC'struecosts.Inaddition,theSECstatedthat"acquisitionswereviewedinlargepartasopportunitiestoensuretheviabilityoffuture'earnings'atCUC,"andthatliabilitiesintheformofreserves"wereestablishedtostockpilefutureincome."Theacquisitionreserveswere"subsequentlyreversedtobringthosefutureearningstofruition."Atfiscalyearend,CUCmanagersutilizedthe"cushion"reservesbyreversingthereservesdirectlyintorevenueoroperatingexpenseaccounts.AccordingtoSECdocuments,CUCmanagersdirectedsubordinatestoreversespecificaggregateamountstorevenueorexpenseaccounts,"leavingittothesubordinatestodecidearbitrarilywhichaccountsshouldbenefitandinwhatamounts."CUCmanagersalsotransferredpartoftheacquisitionreservestoincomeaccountsondivision'sbooks.Forthesetypesoftransactions,CUCmanagementtypicallyselectedsmallerdivisionsthattheyknewwouldnotbefullyaudited.WhenoperatingshortfallsatanewCUCdivisiondepleteditsreserves,CUCwasdesperateforamajorbusinesscombinationandbegandiscussionswithHFS.InMay1997,themergerdiscussionsresultedintheCendantagreementandthepossibilityofreserveslargeenoughtocontinuetheearningsmanipulationschemes.InadditiontousingtheCendantmergerreservestocontinueitsrevenuemanipulationschemes,CUCmanagementalsodirectedthatmillionsofdollarsofCUCassets,bothimpairedandunimpaired,bewrittenoffagainsttheCendantreserve.ThewriteoffofimpairedassetswasnecessarytocoverCUC'sfailuretowriteofftheassetsinthefiscalyearsprecedingtheDecember1997mergerwithHFS.ThewriteoffofunimpairedassetsallowedCUC/Cendanttoavoidmassiveasset-relatedchargestoincomefromcontinuingoperations.InApril1998,CendantbecameawareofsomeoftheaccountingirregularitiesatCUC,restatedearnings,andagreedtochangeitsrevenueaccountingpractices.InJune2000,theSECbroughtcivilandadministrativefraudchargesagainstsevenformerofficialsofCUC,includingthechieffinancialofficer,thecontroller,thevicepresidentofaccountingandfinancialreportingandthedirectoroffinancialreporting.Thechargesagainsttheseindividualsincludedviolationsoftheantifraud,periodicreporting,corporaterecord-keeping,internalcontrolsandlyingtoauditorsprovisionsofthefederalsecuritieslaws.TheSECalsobroughtchargesagainstCendantforviolatingtheperiodicreporting,corporaterecord-keepingandinternalcontrolsprovisionsofthefederalsecuritieslaws.InDecember,Ernst&Young,CUC'sauditors,agreedtopayCendantshareholders$335million.ThecurrentinvestigationofEnron'saccountingpracticesbytheSECandseveralCongressionalCommitteesmayleadtothesametypesofsanctionsagainstindividualsasthoseimposedonCendantexecutives.Recentreportssuggestthatseveralhigh-levelexecutivesatEnronengaged indeliberateattemptstoconcealthemagnitudeofEnron'sdebtfrominvestorsandcreditors,usingoffbalancesheetpartnershipstoconcealdebtobligations(Emshwilleretal,2001).Accordingtopublishedreports,EnronviolatedGAAPbysettinguppartnershipswhichitcontrolledandrecordingthetransferofEnronstocktothepartnershipsinexchangefornotesreceivable(EmshwillerandSmith,2002).PublishedreportsalsoindicatethatEnronusedthepartnershipsitcontrolledtoexchangeimpairedassetsfornotesreceivable.ThispracticeallowedEnrontoincreaseearningsbytheexcessofthenotesreceivableoverthebookvalueoftheassetsexchangedand,atthesametime,removeimpaire!dassetsfromitsbalancesheet(EmshwillerandSmith,2002).AlthoughtheaccountingpracticesinpublishedreportshavenotbeenconfirmedbySECinvestigation,Enron'spastaccountingpracticesledthemtorestateearningsby$586million(Emshwilleretal,2001).b.ManhattanBagelFromitsinitialpublicofferingin1994toJune1996,thestockpriceofManhattanBagelrosefrom$5pershareto$29.ThecompanygrewtobethethirdlargestbagelfranchiseintheUnitedStateswithambitiousplansforsubstantialexpansion.Salesandearningsweregrowing.Thecompanybegantoexpandthroughacquisition.InJanuary1996,thecompanyacquiredaWestCoastbageloperation,however,thefirmfailedtoperformthenecessaryduediligenceandacquiredmillionsofdollarsofoverstatedrevenues.InJune1996,thefirmannouncedaccountingproblemsinitsrecentlyacquiredWestCoastoperations,anditsstockpricewascutinhalfwithindays.Thefree-fallinitsstockpricecontinuedandwiththenegativepublicityandshareholderlawsuitsthatfollowed,thecompanywasunabletosellfranchisesatanywhereneartheirpreviouspace.Eventually,thecompanywasforcedtoseekbankruptcyprotection.c.SunbeamSunbeam,amakerofsmallconsumerappliancessuchasMr.Coffee,hasdrawnmuchattentioninrecentyearsforitsdisappointingfinancialresultsandcutthroattacticsofitsformerCEO,"ChainsawAl"Dunlap.ThenicknamewasgiventoMr.Dunlapforthemannerinwhichhecutthesizeoftheemployeebase.Inmid-November2000,theSECconcludeditsinvestigationintoaccountingpracticesatSunbeam.TheSECchargedthatSunbeamrecognizedrevenuesprematurelyfromsalespromotionswithretailersin1997.ThisactivitywaspriortothedismissalofSunbeam'sinfamousCEO,whowasterminatedin1998.AlthoughnotdiscussedintheSECruling,itwouldnotbesurprisingifthestressoftheenvironmentcontributedtotheaggressiverevenuerecognition. d.TycoRecently,Tycowasforcedtorestatefiscal1999andthefirstquarterof2000duetocertainmerger,restructuringandothernon-recurringcharges,increasing1999earningsanddecreasingearningsforthefirstquarterof2000.Tycoisstillunderinvestigationforitsusageofpoolingofinterestaccountinginitsmergerandacquisitionactivities.BasedontheSECruling,itappearsthatTycosetaside"cookiejarreserves"in1999andbegantoreducetheliabilitiesin2000,thus,increasingearnings.e.SensormaticBetween1994and1995,Sensormaticrecognizedout-of-periodrevenue,overstatingearningstomeetanalysts'expectations.TheChairmanandCFOhadtopaypenaltiesof$50,000and$40,000,respectively.Mostlikely,therewerequiteafewindividualinvestorswhoincurredgreaterfinanciallossesasaresultoftheiractions.f.3Com3ComagreedinNovember2000topay$259milliontosettleshareholderlawsuitsinvolvingaccountingirregularitiesfollowingits1997acquisitionofU.S.RoboticsCorp.3ComhadallegedlyconcealedlossesatU.S.Roboticswhentheycombinedthecompanies.UnderpressurefromtheSEC,3Comwasforcedtoreduceitstatednetincomefor1997by$111millionandreduceapurchase-relatedchargefor1998by$158million.g.W.R.GraceWRGrace&Co.waschargedbytheSECwithmanipulationofitsearningsthroughtheuseof"cookiejar"reservesusedtosmoothreportedearningsinitsNationalMedicalCareInc.unit.Theabovecasesarejustasampleofsomeoftherecentcases.Thesecasesdisplaysomeofthecircumstancesandwaysinwhichearningscanbemanipulated,includingcasesofblatantfraud,aggressiverevenuerecognition,cookiejarreservesandinadequateduediligenceinmergersandacquisitionpractices.h.MicroStrategy(AAER1350,12/14/00),MAX(AAER1430,08/01/01),andIndus(AAER1437,09/01/01)MicroStrategybeganbusinessin1989,andwentpublicinJune1998.InApril2000,whenMicroStrategydisclosedthatithadoverstateditsrevenueandearningsoverathree-yearperiod,itsstockpricedroppedfromahighof$333pershareto$33pershare.InDecember2000,theSECannouncedthatitwasbringingchargesagainstMicroStrategy,itsfounder,andseveral membersofmanagement.TheSECallegedthatMicroStrategyhadmateriallyoverstateditsrevenuesandearnings,showingagrowingcompanywithpositivenetincomewhenitshouldhavereportednetlosses.MicroStrategy'sreportingfailureswereprimarilytheresultofprematurerecognitionofrevenue.TheSECdocumentedthatMicroStrategy'swrittencompanypolicyrequiredthatmanagementcounter-signallcontractsreceivedfromcustomersbeforerevenuecouldberecognized.However,managementdidnotsigncontractsreceivedneartheendofquartersuntilafteritdeterminedhowmuchrevenuewasrequiredtoachievedesiredquarterlyresults.Atthattime,itwouldassign"effectivedates"tothecontractsdependingonwhetheritwantedtoapportionthecontractstothethen-currentquarterorthejust-endedquarter.Inatleastthreeinstances,MicroStrategyrecognizedrevenueontransactionsthatwerenotcompletedorsignedbyeitherthecustomerormanagementpriortoquarterend.Inoneinstance,MicroStrategyrecordedacontractinthequarterendingDecember1999,whenneitherthecustomernorMicroStrategysignedthecontractuntilJan.3,2000.Similarly,onSept.30,1999,MicroStrategyrecognized$17.5millioninrevenuefromatransactionalthoughthecontractwasnotsigneduntilOct.1,1999.ForthequarterendedMarch31,1999,MicroStrategyrecognizedrevenueforacontractthatwassignedApril2,1999,butdatedMarch31,1999.Before1996,themajorityofMicroStrategyrevenueswerefromthesaleofsoftwarelicenses.ShortlybeforegoingpublicinJune1998,MicroStrategybegantoengageinlargerandmorecomplextransactionsinvolvingthesaleofsoftwareaswellasextensivesoftwareapplicationdevelopmentandconsultingservices.ThenatureofthemultipleelementdealsatMicroStrategygaverisetoaccountingpracticesthatwerenotinaccordancewithGAAP.AccordingtoSECdocuments,MicroStrategyrecognizedrevenueonanumberofmultiple-elementtransactionsinwhichitimproperlyseparatedproductlicensesalesfromserviceelements.SECdocumentsdetailatransactioninwhichMicroStrategynegotiateda$4.5milliontransactiontoprovidesoftwarelicensesandextensiveconsultinganddevelopmentservices.Themajorityofthesoftwarelicensesweretobeusedinconjunctionwithto-bedevelopedapplications,indicatingthattheproductandserviceelementswereinterdependent.However,MicroStrategyrecognizedtheentire$4.5millionreceivedinthetransactionassoftwareproductlicenserevenue,allocatingnorevenuetotheextensiveserviceobligations.Inaddition,MicroStrategyrecognized$5millionofrevenuefromatransactioninwhichitessentiallyswapped$5millionofsoftware.GAAPrequiresthatthetransactionshouldhavebeenaccountedforasabartertransaction,withnorevenuebeingrecognizedbyeitherentityinvolvedinthetransaction.MicroStrategyalsoenteredintoanagreementinwhichitagreedtoprovidesoftwarelicenses,maintenanceand servicestoalargeretailer.Inasidelettertotheagreement,MicroStrategy'ssalesstaffpromisedtheretailerfutureproductatnocost,althoughtheproducthadnotyetbeendeveloped.UnderGAAP,therevenueshouldhavebeendeferredbecausethevalueofthefutureproductcouldnotbedetermined.MicroStrategyannouncedthatitwouldrestateearningsforthreeyearstocomplywithGAAP.Aftertheannouncement,MicroStrategystockfell62percentinoneday.InApril2001,thecompanysettledaclassactionsuitallegingfraudarisingfromitsaccountingpractices.Threeofitsexecutiveofficersatthetimeoftherestatementagreedtofraudinjunctionsandpaidpenaltiesof$350,000each.Thecompanyagreedtoundertakecorporategovernancechangesandimplementasystemofinternalcontrols.LikeMicroStrategy,MAX(AAER1430,08/01/01)andIndus(AAER1437,09/05/01)alsowerecitedforimproperrevenuerecognitionpractices.AccordingtoSECdocuments,MAX'stopexecutivesrecordedillegitimatesalestoprotectMAX'sstockprice.Duringfiscal2000,MAX,adevelopmentstagecompany,recordedthreeillegitimatesalestransactionsrepresenting98percentofitsrevenues.Oneoftheillegitimatetransactionsinvolvedrecordingrevenuebackedonlybyasalesagreementwhichwaslatercancelled.Theothertwotransactionsinvolvedsalestodistributorswhoweregrantedsubstantialrightsofreturn,withnoobligationtopayforthemerchandiseuntilitwassoldtoretailcustomers.Becausetheycouldnotselltheproducts,bothdistributorsultimatelyreturnedthemerchandise.Duringfiscal1999,MAX'sreportedrevenuesofapproximately$8.1millionconsistedprimarilyofpurportedsalestotheBraziliangovernmentandaChileanentity.TheallegedsaletotheB!raziliangovernmentwasshippedinpartinDecember1999,butremainedincustomsthroughJanuary2000.TheBraziliangovernmentlaterrefusedtheshipment.MAX'sshippingagentpickedupthemerchandisefortheallegedsaletotheChileanentitybutwasinstructedbyMAXtoholdthemerchandiseindefinitely.TheshippingagenteventuallysentthemerchandisebacktoMAX.AtIndus(AAER1437,09/05/01),threehigh-levelsalesexecutiveshidschemestoimproperlyrecognizerevenuefromtheirownaccountingstaff.Inatleasttwocases,theexecutivesprovidedsidelettersgrantingcustomerstherighttocanceltheircontractsandhidtheexistenceofthesidelettersfromtheaccountingdepartment.Inanothercase,aprospectivecustomerplacedanorderwithIndusthatwascontingentuponthecustomerobtainingabidjob.Whentheexecutiveslearnedthatthecustomerdidnotobtainthebidjobandconsequentlycancelledthesalesorder,theexecutivesfalsifiedshippingdocumentstoprovidetheiraccountingdepartmentdocumentationsupportingthe"shipment."Topreventoutsideauditorsfromdiscoveringthescheme,theexecutivesconvincedthecustomertosignamisleadingauditconfirmationletter.Inatleastoneotherinstance,theexecutivessimplyfalsifiedsalesdocumentsbybackdatingorremovinglanguagereferringtorightofreturnorfutureobligations.Asaresultoftheimproper revenuerecognizedbyIndus,incomewasoverstatedbyapproximately$2.4million,or300.8percent.i.LucentLucentTechnologies,anAT&Tspin-off,startedtradingpubliclyin1996withaninitialpublicofferingthatwas,atthetime,thelargestindomestichistory.InDecember1999,Lucent'sstockwassellingat$77.78andwasthenation'sfourthmostwidelyheldstock.However,byJuly2001,Lucent'sstockwastradingat$6.43,theSECwasinvestigatingitsaccountingpracticesandseveralformer,high-levelmanagershadbeensanctionedbytheSECorwereundercriminalindictmentforwrong-doingwhileatLucent(RomeroandAtlas).ThedeclineinLucent'sstockvaluehasbeenattributedtoaNov.21,2000announcementinwhichLucentsaidithadvoluntarilyreportedaccountingirregularitiestotheSEC.Asaresultofitsowninternalinvestigation,LucentrestateditsSept.30,2000financialstatements,reducingrevenueby$679million(McGough).AlthoughmanyanalystsandinvestorswereshockedbythemagnitudeoftheaccountingirregularitiesatLucent,othersclearlysawthe"writingonthewall"longbeforetheDecember2000restatement.AccordingtoaJanuary2000WallStreetJournalarticle,Lucenthadused"awholemyriadofaggressiveaccountingmovestoboostitsgrowth."OneanalystestimatedthatLucentaddedabout27centsasharetoitsearningsthrough"deftaccountingmoves,"includingcreativeacquisitionaccounting(MehtaandMacDonald).InOctober1998,BusinessWeekreportedthatLucentavoidedsomegoodwillamortizationbywritingoff$2.3billionofin-processresearchanddevelopmentascompanieswereacquired.Lucent'searningsalsobenefitedfroma$2.8billionreservefor"bigbath"restructuringchargesthatwererecordedaspartofLucent'sspin-offfromAT&T(McGough).SomeanalystsbelieveLucentputasidefarmorethanwasneededtocoverrestructuringexpensesandusedtheexcessreservestosmoothearnings(Byrnes,Melcher,Sparks).Inadditiontoacquisitionreservesandrestructuringcharges,Lucentmayhaveusedotherreservestoboostincome.Forexample,althoughrevenueandaccountsreceivableincreasedinfiscal1999,Lucentlowereditsbad-debtreserves(Byrnes,Melcher,Sparks).Inaddition,someobserversbelievethatLucentimproperlylowereditsreservesforobsoleteinventoryin1999(MehtaandMacDonald).BecauseLucent'sreservesandrestructuringchargeswereproperlydisclosedinitsexternalfinancialstatements,itispossiblethatmanagement'sintentwithrespecttoaccountingforreserveswastoproperlyreflecttheunderlyingfinancialconditionofthecompany.However,the aftermathofLucent'sDecember2000restatementinwhichrevenueswerereducedby$679million,createddoubt.Two-thirdsofthe$679millionreductioninrevenue,or$452million,wasattributedto"channelstuffing"sales,inwhichtransfersofproductstodistributorsarerecordedassalesalthoughtheproductsarenotyetsoldtoend-users(Murphy).Therestatementalsoreducedrevenuesby$199millionbecausecustomerswerepromiseddiscounts,creditsandrightsofreturn(BermanandBlumenstien).Lucentalsonullified$28millioninrevenuerecognizedonapartialshipmentofequipment(Berman,Schroeder,Young).Byprematurelyrecordingsalesofmaintenanceagreements,byprematurelyrecordingsalesmadetodistributorsandbyofferingdiscounts,one-timecreditsandotherincentivesforcustomerstoorderproductsinadvanceoftheirneeds,Lucent'spractices"borrowed"heavilyfromfuturesales.AsLucent's"debt"mountedfromquartertoquarter,itbecamemoreandmoredifficulttomeetanalysts'revenueandearningsexpectations.ShortlyafterfiscalyearendingSeptember2000,aLucentemployeecalculatedthatsalesresultingfromaggressivetacticssuchasgivingcustomersone-timepromisesofcreditstowardfuturepurchasestotaledapproximately$1.8billion(BermanandBlumenstein).OfferingdiscountsandotherincentivesaspartofpromotionalcampaignswhensalesaresluggishisanacceptablemanagementpracticeandwithintheboundariesofGAAP.However,promotionalcampaignsaretypicallywellorganizedattemptstoimproveoverallmarketshareorcreatemarketnichesinresponsetochangingeconomicconditions.Bytheirownadmission,however,Lucent'soffersofdiscountsandincentiveswerenotintegratedintopromotionalcampaignsbut,rather,ad-hocresponsestointernalandexternalpressuretomeetsalesgoalsandanalyst'spredictionsonaquarter-by-quarterbasis.Lucent'sreputationasa"growth"companyfueledtheneedforever-increasingsales.Lucent'schiefexecutivehadturnedLucentintoaWallStreetstarbyincreasingsalesatadouble-digitpaceandwasdeterminedtomaintainLucent's"growth."ManyobserversbelievethatLucent'ssalesprojectionswereimposedonsalesexecutivesbythechiefexecutivewhowasintentonmaintaining20percentgrowth(BermanandBlumenstein).Eventually,thepressuretogrowinaneconomythatwasslowingdownandinacompanythathad"borrowed"salesfromthefuture,leadtoawhistle-bloweractionbytheLucentsalesexecutivewhosesalesunitproduced60percentofLucent'ssales(BermanandBlumenstein).Theexecutivewasforcedtoresignwhensheexpressedherconcernoverherunit'sabilitytomeetsalesgoals.Onherlastdayatwork,sheoutlinedherconcernsinameetingofabout20Lucentexecutives.Followingthemeeting,Lucentofficialsbeganexaminingsalesand,onNov.20,alertedtheSECthattherewereaccountingproblemsrelatedtosalesrecordedforthefiscal yearendedSept.30,2000.OnNov.21,aLucentpressreleaseindicatedthatithadcontactedtheSECandhadreverseda$125millionsaleforwhichithaddiscoveredfalsedocumentation,firingthesalespersonresponsibleforthesale.LaterinvestigationsbyLucentuncoveredotherquestionablesalesandledtotheDecember2000resta!tementinwhichrevenuewasreduced$679million.TheCendant,MicroStrategyandLucentcasesshareseveralcommoncharacteristics:1.Theearningsmanagementactivitiestookplaceoverextendedperiodsoftime,escalatingfromquestionableandimproperrevenuerecognitionpracticestootherformsofearningsmanagement;2.Theearningsmanagementpracticeswereinitiated"atthetop,"buteventuallyinvolvedhigh-levelmanagersandtheirsubordinates;and3.Theearningsmanagementpracticeswerenotuncoveredbyexternalauditorsorauditcommittees.ThesecharacteristicsandtheSEC'sannouncedpolicyofenforcingactionagainstcompaniesengaginginabusiveearningsmanagementsuggestthataccountantsandauditorsshouldbevigilantintheirattemptstoidentifyearningsmanagementactivitiyinitsearlystages.AsSECDirectorofEnforcementRichardH.WalkersaidwhenannouncingtheMicroStrategysanctionsinanSECNewsreleasedatedDec.14,2000:"Thiscaseillustrateshowcriticalitisforallcompanies-andespeciallyforcompaniesnewtothepublicmarkets-toimplementeffectiveinternalcontrolsandtostrictlyadheretotheletterandthespiritoftheaccountingrulesforrevenuerecognition,andshowsthattheCommissionwillholdtheexecutiveofficersresponsibleforacompany'sfailuretodoso."8.DetectingEarningsManagement(MagrathandWeld,Aug.,2002,CPAJournal)Fraudulentaccountingpracticesinvolvingrestructuringcharges,reserves,creativeacquisitionaccounting,andmanipulationofGAAPareverydifficultforoutsiderstodetect.Insidersresponsibleforearningsmanagementareintentonhidingsuchactivities,particularlywhentheearningsmanagementpracticesescalatebeyondimproperrevenuerecognition.AsthechargesinseveralSECinvestigationsindicate,whenmanagersengageinabusiveearningsmanagementpracticestheymustlietoauditors,analysts,investors,andtheirowncoworkerstocoverthesefraudulentactivities.SECdocumentsindicatethat,inmanycases,oncetheabusiveearningsmanagementpracticesbecomefirmlyentrenchedatacompany,high-levelmanagersspendagreatdealoftimedevisingmethodstoensurethattheabusivepracticescontinue.Becauseoutsiderscannotobservemanagement'sday-to-dayactivities,investorsandauditorsshouldlookcarefullyforwarningsignsthatabusiveearningsmanagementispresent: *CashflowsthatarenotcorrelatedwithearningsCashflows.Oneofthemostobviouswarningsignsthatcompaniesareengaginginimproperrevenuerecognitionisalackofcorrelationbetweencashflowfromoperationsandearnings.Ifrevenueisproperlyrecognized,cashflowsshouldcloselyfollowrevenuerecognition;thatis,thebusinesscyclewillbecompletedandcashwillbeavailableforreinvestmentwhencustomersdischargetheirobligationsinatimelymanner.Cashflowlaggingsignificantlybehindrevenuescouldbeasignthatcompaniesareinflatingrevenuesbyrecognizingsalesininappropriateperiods,makingsalestononcreditworthycustomers,orrecordingfictitioussales.*ReceivablesthatarenotcorrelatedwithrevenuesReceivables.Investorsshouldalsocomparereceivablesandcashflowfromoperationswithrevenuesandearnings.Receivablesrisingmorequicklythanrevenuescouldbeasignthatcustomersareexperiencingfinancialdistress.Itcouldalsobeasignthatacompanyisengaginginabusiveearningsmanagementbyrecordingfictitioussalesorotherwiseinflatingrevenuesandaccountsreceivable.Forexample,aJune2000WallStreetJournalarticlesuggestedthatLucentTechnologiesmightbeengagingincreativeaccountingpractices,notingthatLucent'sreceivableswererisingat49%whilerevenueswererisingatonly20%.*AllowancesforuncollectibleaccountsthatarenotcorrelatedwithreceivablesAllowanceforuncollectibleaccounts.Analyzingreservesforuncollectibleaccountscouldalsoprovidecluesofabusiveearningsmanagement.Receivablesgrowthnotalsoreflectedintheallowancecouldbeasignthatmanagersareawarethatrevenueswererecordedprematurely.Itcouldalsobeasignthatmanagershavedeliberatelyunderstatedtheirreservesforuncollectibleaccountsorrecordedfictitiousrevenues.BothLucentandCendantdecreasedtheirreservesforuncollectibleaccountsattimeswhenrevenuesandreceivableswererising.*ReservesthatarenotcorrelatedwithbalancesheetitemsOtherreserves.Usingreservestoappropriatelymatchearningswithassociatedcostsisafundamentalaccrualaccountingconcept.GAAPrequiresthatreservesbeestablishedforuncollectibleaccounts,warrantiesandguarantees,futurecommissions,andahostofotherlegitimatebusinesspurposes.Thesereservesaredesignedtoensurepropermatchingofrevenues(orgains)andrelatedcosts.GAAPalsoallows,understringentcriteria,theestablishmentofrestructuringreservestoreflectthebeneficialeffectoftherestructuringonincomeinfutureperiods.Reservesareestablishedbeforecircumstancesrequiringtheiruseareknownwithcertaintyand,therefore,requireinformedjudgments.High-levelmanagers,whoareinthebest positiontounderstandtheircustomers,company,andindustry,frequentlycontrolthetermsandconditionsbywhichreserveaccountsarechanged.Investorsshouldcarefullyscrutinizealldisclosurenotesandotherdiscussionmaterialsrelatedtoreservestodetermineifchangesinreserveaccountsareconsistentwithgoodbusinesspractices.Forexample,Cendantmanipulateditscancellationandcommissionreservesdownwardatatimewhenrevenueswereincreasing.Lucentmanipulateditspensionreservesandsignificantlyinflatedearningsbychangingitsaccountingpolicies.Bothcompaniesmanipulatedoroverstatedacquisitionandpurchasereserves.*QuestionableacquisitionreservesAcquisitionreserves.Investorsandauditorsshouldcarefullyreviewthecircumstancessurroundingacquisitions.Escalatingabusiveearningsmanagementpracticesoftenprovideincentivesforcompaniestoseekbusinesscombinationsthatcanbeusedtostrengthentheir"cookiejar."Ifthereisnoapparentbusinesspurposeforabusinesscombination,investorsandauditorsshouldcarefullyanalyzethetransaction.Ifrestructuringchargesorreservessetasidefordisposalsarecreated,investorsandauditorsshouldquestionthelegitimacyofthebusinesscombinationoracquisition.Forexample,SECdocumentsindicatethatCendantmanagementintentionallyoverstatedmergerandpurchasereserves,whichweresubsequentlyreverseddirectlyintooperatingexpensesandrevenues.*Earningsthatconsistentlyandpreciselymeetanalysts'expectations.Consistentearnings.Finally,investorsandauditorsshouldcarefullyexaminetheaccountingpracticesofcompaniesthatconsistentlyandpreciselymeetanalysts'expectations,particularlygrowthexpectations.Analysts'expectationsarebasedinpartoninformationobtainedfromcompanymanagement;therefore,companiesstrivetomeetanalysts'expectationstoprotecttheirreputationsaswellasthemarketvalueoftheirstock.Althoughmanycompaniesemploylegitimatemeanstomeetorexceedanalysts'expectations,othercompaniesmayengageinabusiveearningsmanagementpracticestocoverfailuresresultingfromoverlyoptimisticpredictions,economicdownturns,orbusinesssetbacks.Forexample,Cendantmanipulateditsfinancialreportstoensurethatrevenuesandexpenseswereconsistentlyreportedatapproximatelythesamepercentageseachquarter.Whileallbusinessesstriveforsmoothearnings,consistenciessuchasthosereportedbyCendantshouldtriggercloseranalysisoffinancialreports.Asurveyoffraudulentaccountingmanagement?(Whenearningsmanagementbecomesfraud,InternalAuditing,Sept./Oct.2002) 1.Inmostcases,topmanagementareinvolvedwithperpetratingthefraud.2.ThoseindustriesinComputerSoftware,MedicalService,andTelecommunicationsaremostlikelytoconductfraudulentaccountingmanagement.3.ImproperrevenuerecognitionisthemostoftenseenviolationofGAAP.
