Earnings Management Case Study

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2.3.1 Big Bath

There are different patterns of earnings management. One of them is a big bath. The general idea of “big bath” is if the organization is going through a bad earning management, the manager may record more expenses to make current financial year even worse. On the other hand, manager by doing so expect this, in the year’s later, those expenses will decrease earnings management. How can managers meet the cost of to do so? By using their judgment, they will deliberately select income- reducing accruals in manipulative financial numbers such as deferring revenue or accelerating write- offs (Healy, 1985). Big bath strategy can be easily used as the practice of conservatism principle, which prefers recording lower earnings management …show more content…

At the year of adoption (2002), SFAS no.142 identifies that first write-downs taken that year can be recognized, as the change in accounting principles, therefore may not influence working results. Any write down in the subsequent years should be known as the operating cost. Jordan and Clarks (2004) concluded that most organizations in the first group record necessary lower earnings management than the other in 2002. Furthermore, the first group also experienced important higher rate of negative earnings management in 2002 whereas both groups had the same rates of firms with negative earnings management in 2001. The study findings showed that this new accounting standard had given organizations an opportunity to practice earnings management in the year of adoption. Other studies propose big write-offs mostly occur when there is a change in management teams. New managers perform those write-offs as offset for their previous fault. Levitt (1998) stated that significant restructuring charges as one of big bath strategy. Tokuga and Yamashita (2011) concluded that evidence of potential big bath practices in case of Nissan Motor Company in 2000. After the change in Chief Operating Officer was a large business restructuring reserve (-232.692 Million Yen) for a …show more content…

This earnings management taken place when an organization acquires another company. When recording this type of business activity into financial statements, managers can choose to: Writing off in-process R&D cost for the organizations acquired: This cost will be recorded as one time charge at acquisition year, therefore reduced burden for forthcoming earnings management. Integrating acquired organization’s earnings management into parent organization’s consolidated earnings management: If the acquired company is doing well, this act will help boosting acquirer’s earnings management.
2.3.4 Revenue recognition

Earnings management through revenue recognition principle such as creating false revenue, changing time in recognizing revenue: early revenue recognition or deferred revenue recognition are general practices that are used under this earnings management. Hence, it will increase the revenues and profit

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