Surveys completed by 169 CFOs showed, “CFOs believe that in any given period about 20% of firms manage earnings…only about 60% of earnings
There are policies and practices within GAAP, that allow for a certain amount of flexibility, i.e. where reasonable individuals may disagree, such as revenue recognition timing; depreciation and amortization policies; allowance for doubtful accounts projections; pension expense estimates; and inventory valuation.
These discretionary practices are also causing issues within the Auditing community. Based on a recent report issued by the Public Company
Issues arise when these policies allow for abuse. Private companies may wish to increase expenses and lower earnings, to minimize taxes; while public companies may wish to decrease expenses and increase earnings, to achieve a higher stock valuation. These strategies primarily move earnings from period to period. To sustain the desired approach, successive quarters will need to be manipulated. Regardless of your initial reason to manage the earnings, the end result will be a strategy where you mislead investors and lenders, i.e. commit fraud.
Additionally, there are also policies within GAAP that make targeted manipulation possible. Common manipulation techniques include – over-accruing “cookie-jar reserves”; and establishing a reserve for restructuring charges “big-bath reserves.”
To avoid this situation - institute a strong control environment; and, retain a