Professional Documents
Culture Documents
New
competitors/substitute
products
Economy/policy changes
Accounting analysis
Managers accounting discretions
Advantages
Managers have intimate knowledge of their firms
business
Accounting discretions allow managers to reflect inside
information in reported financial statement
Disadvantages
Managers can use the discretions to report distorted
accounting information
Incentives
Managers compensation contracts
Performance based pay Stock options Personal
reputation
Contracts with lenders
Loan covenants
Credit ratings
(Social) Contract with stakeholders
Employees and Employees, customers
Regulators, and competitors
Pressure from financial markets
Avoid negative news/image Maintain share prices
Avoid volatility in earnings Meet analyst and investor
expectations
Positive earnings
Earnings in the same quarter last year
Analysts earnings forecasts
Earnings = Cash Flows + Accruals
Characteristics of manipulating firms (Evidence)
Strong performance prior to the manipulations
Abnormally high P/E and P/B ratios
Pressure from the market to maintain high growth rate
In manipulation years
Cash profit margins and earnings growths decline
Accruals increase
Demand decreases for their products
Free cash flows drops Financing activity increases