What drives earnings management?
(Generally Accepted Accounting Principles) Paul Rosenfield. Full Text: COPYRIGHT 2000 American Institute of CPA’s It is GAAP itself. Two years ago, SEC Chairman Arthur Levitt charged that widely publicized accounting problems at a number of companies were in danger of undermining U.S. capital markets. One of the processes he blasted was earningsmanagement–an effort among the issuers of financial reports (managements and boards of directors, who have the authority to specify the contents of the reports) “to satisfy consensus earnings estimates and project a smooth earnings path” (see “Arthur Levitt Addresses `Illusions,'” JofA, Dec.98, page 12). The accounting literature defines earnings management as “distorting the application of generally accepted accounting principles.” Many in the financial community (including the SEC) assume that GAAP deters earningsmanagement. However, my opinion, which I have expressed in a letter to Chairman Levitt, is that earningsmanagement results less fro
