Articlegreen2007

EARNINGS MANAGEMENT IN ENGLISH NHS HOSPITAL TRUSTS

Joan Ballantine · John J. Forker · Margaret J. Greenwood

62 citations0/0 files storedFinancial Accountability and Management

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Auditing, Earnings Management, Governance Accounting Theory and Financial Reporting Accounting and Organizational Management

Abstract

In this paper we review the financial reporting incentives associated with the requirement to breakeven for English NHS Trusts. We also investigate the distribution of reported income and estimate discretionary accruals thereby contributing to the limited literature on earnings management in not‐for‐profit hospitals. We find that Trust managers use discretion over accruals to report income within the target range around zero. The results are robust to recent challenges to earnings management explanations arising from the use of distributional and aggregate accruals methodologies. Our findings indicate that a precise and challenging financial breakeven target based on current cost residual income is associated with wide‐spread use of discretionary accruals to an extent that weakens the accountability of NHS Trusts.

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References

1991Earnings Management During Import Relief Investigations 2002The Quality of Accruals and Earnings: The Role of Accrual Estimation Errors 1999A Review of the Earnings Management Literature and Its Implications for Standard Setting 1997Earnings management to avoid earnings decreases and losses 1995The information content of losses 1998Earnings Management and the Long‐Run Market Performance of Initial Public Offerings 1998Earnings management and the underperformance of seasoned equity offerings11We thank Brad Barber (the referee), Randy Beatty, Vic Bernard, K.C. Chan, Kent Daniel, M. DeFond, Laura Field, David Heike, Chuan Yang Hwang, Jonathan Karpoff, S.P. Kothari, Charles Lee, Wayne Mikkelson (the editor), Tim Opler, Krishna Palepu, K. Ramesh, Jay Ritter, Terry Shevlin, Doug Skinner, Sheridan Titman, Ross Watts, Jerry Zimmerman, and seminar participants at the University of California Finance and Accounting Conference (Davis, March 1995), the NBER Corporate Finance Conference (Boston, August 1995), the Center for Research in Security Prices Seminar (Chicago, October 1995), the American Finance Association Conference (San Francisco, 1996), the American Accounting Association Conference (Chicago, August 1996), the University of Michigan, and the University of Rochester for helpful comments and discussions.2002Discussion of the Quality of Accruals and Earnings: The Role of Accrual Estimation Errors

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2012Do Non‐profit Organizations Manage Earnings toward Zero Profit and Does Governmental Financing Play a Role?

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