Would Requiring Ex-Post Earnings Revisions Reduce Earnings Manipulation?

Posted: 22 Jun 2006

Date Written: March 8, 2006

Abstract

Lev (2003) proposes that publicly-traded firms be required to revise their annual earnings to take into account the realized values of accounting estimates made in computing the originally-announced earnings numbers. These audited revisions would be required both one and three years after the original earnings announcements. The presumption is that, if firms were required to disclose in the future how accurate (or inaccurate) their current accounting estimates are, they would have greater incentive (at least in the case of egregious earnings manipulations) to incorporate more accurate estimates into their earnings computations than under the current system, in which no such explicit ex-post estimate accuracy is revealed. If this requirement were to have that effect, then more accurate earnings (i.e., less earnings manipulation) and fewer earnings restatements should result. The current paper will provide experimental evidence as to whether Lev's (2003) proposal would have its intended results.

Keywords: Earnings Manipulation, Earnings Management, Earnings Restatements

JEL Classification: M41, G38, C91

Suggested Citation

Orchard, Lou X., Would Requiring Ex-Post Earnings Revisions Reduce Earnings Manipulation? (March 8, 2006). Available at SSRN: https://ssrn.com/abstract=910602

Lou X. Orchard (Contact Author)

Wichita State University ( email )

Wichita, KS 67260-0078
United States

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