Articlegreen2009

The “Numbers Game” in the Pre- and Post-Sarbanes-Oxley Eras

207 citations0/0 files storedJournal of Accounting Auditing & Finance

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Auditing, Earnings Management, Governance Accounting and Organizational Management Corporate Governance and Financial Management

Abstract

This paper asks two questions. First, has the prevalence of expectations management to meet/beat analyst expectations changed in the aftermath of the 2001-2002 accounting scandals and the passage of the 2002 Sarbanes-Oxley Act (SOX)? Second, has the mix among the three mechanisms used for meeting earnings targets: accrual earnings management, real earnings management, and earnings expectations management shifted in the Post-SOX Period? We document that the propensity to meet/beat analyst expectations has declined significantly in the Post-SOX Period. Our primary findings explain this pattern. In particular, we find a decline in the use of expectations management and accrual management, and no change in real earnings management in the Post-SOX Period relative to the preceding seven-year period. Our results are robust to controlling for varying macro economic conditions. These findings contribute to the academic literature, investors, and regulators.

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References

1991Earnings Management During Import Relief Investigations 2005The economic implications of corporate financial reporting 2003Earnings Management through Real Activities Manipulation 2012Detecting Earnings Management 2008Real and Accrual-Based Earnings Management in the Pre- and Post-Sarbanes-Oxley Periods 1994Debt covenant violation and manipulation of accruals 1999Earnings Management to Exceed Thresholds 2002The rewards to meeting or beating earnings expectations

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