Articlebronze2011

Big Bath Earnings Management: The Case Of Goodwill Impairment Under SFAS No. 142

96 citations0/0 files storedJournal of Applied Business Research (JABR)

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

Abstract

The big bath theory of earnings management suggests that firms experiencing low earnings in a given year may take discretionary write downs to reduce even further the current period’s earnings. The notion is that the company and its management will not be punished proportionately more for the big hit it takes to its already depressed earnings. This “clearing of the decks” makes it easier to generate higher profits in later years. SFAS No. 142, with its new requirement to test goodwill annually for impairment, provided a unique opportunity to test this big bath theory. Examining Fortune 100 companies, this study presents compelling evidence that the big bath theory is more than just a theory but is instead a practiced method of managing earnings.

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References

2011The effects of bonus schemes on accounting decisions 1988An Explanation for Accounting Income Smoothing 1995A Theory of Income and Dividend Smoothing Based on Incumbency Rents 1988Write-Offs As Accounting Procedures to Manage Perceptions 2002Can “Big Bath” and Earnings Smoothing Co‐exist as Equilibrium Financial Reporting Strategies?1987Income Smoothing and Incentives: Empirical Tests Using Accounting Changes.1987Asset Writedowns: Managerial Incentives and Security Returns 1991‘Big Bath Accounting’ Using Extraordinary Items Adjustments: Australian Empirical Evidence

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