How are Earnings Managed: Examples from Auditors

Posted: 2 Jun 2003

See all articles by Mark W. Nelson

Mark W. Nelson

Cornell University - Samuel Curtis Johnson Graduate School of Management

John A. Elliott

University of Connecticut - Department of Accounting

Robin L. Tarpley

George Washington University - Department of Accountancy

Abstract

This paper reports descriptive evidence about how managers attempt to manage earnings, based on a sample of 515 earnings-management attempts obtained from a survey of 253 experienced auditors (and also analyzed by Nelson et al. 2002). We classify attempts first according to primary approach: expense recognition, revenue recognition, issues unique to business combinations, and other issues. Then, within each of those broad categories, we subclassify attempts by the particular approach used in the attempt. For each specific approach, we report the accounts involved, the frequency with which the approach increased or decreased current-period income (and the frequency of adjustments required by the auditor), and provide descriptions by auditors of income-increasing and income-decreasing examples of the more frequent approaches. We also link our findings to recent SEC Accounting and Auditing Enforcement Releases ("AAERs") that illustrate extreme versions of the specific approaches identified by our participants. This experienced-based, example-rich framework and frequency data should assist investors, auditors, audit committees, and other participants in the financial reporting process who need to be vigilant for earnings-management approaches.

Keywords: earnings management, financial statements, auditing, examples, categories, frequency, fraud

JEL Classification: M41, M43, M44, M49, G14

Suggested Citation

Nelson, Mark W. and Elliott, John A. and Tarpley, Robin L., How are Earnings Managed: Examples from Auditors. Accounting Horizons, Supplement, 2003. Available at SSRN: https://ssrn.com/abstract=394927

Mark W. Nelson (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

448 Sage Hall
Ithaca, NY 14853
United States
607-255-6323 (Phone)
607-254-4590 (Fax)

John A. Elliott

University of Connecticut - Department of Accounting ( email )

School of Business
Storrs, CT 06269-2041
United States
860-486-5524 (Phone)

Robin L. Tarpley

George Washington University - Department of Accountancy ( email )

School of Business and Public Management
Washington, DC 20052
United States

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