A review of SEC Chairman Levitt's report on earnings management, using specific company examples.
Written in 2004; 1,224 words; 9 sources; MLA; $ 41.95
Paper Summary:
The purpose of this paper is to provide examples of companies that engaged in some form of earnings management between 1992-2001 and identify which of Levitt's reporting illusion categories they illustrate. The reporting illusions identified by Levitt are as follows: "big bath restructuring charges"; creative acquisition accounting; "cookie jar" reserves; "immaterial" misapplications of accounting principles; and premature recognition of revenue.
From the Paper:
""Big bath restructuring" charges are when large charges associated with company restructuring occur to help companies clean up their balance sheet. Companies do this when earnings take a major hit, thinking that Wall Street will look beyond a one-time loss and focus then only on future earnings (Levitt 1998). "Creative acquisition" accounting is when a company classifies an ever-growing portion of the acquisition price of a merger as "in process" research and development so the amount can be written off as a one time charge removing any future earnings drag (Levitt 1998). Also done is the creation of large liabilities or future operating expenses to protect future earnings done under the mask of an acquisition (Levitt 1998). What Levitt termed as "cookie jar reserves" is when a company uses unrealistic assumptions to estimate liabilities for things like warranty costs, loan losses or sales returns (1998). In effect, this stashes accruals into a cookie jar when can be raided when needed in the bad times."
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