Earnings Management: do the type of GAAP, persuasive client explanation, and SEC notification influence the auditors' decisions?

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Title: Earnings Management: do the type of GAAP, persuasive client explanation, and SEC notification influence the auditors' decisions?
Author: Segovia, Joann R
Abstract: While many researchers have examined earnings management and the firm's motivation to manage earnings , few researchers have examined the role of auditors in potentially approving earnings management . Several factors influence the auditors' subjective judgment in evaluating the interpretation of generally accepted accounting principles (GAAP ) by client management who may have incentives that bias the interpretation of GAAP to achieve target earnings . This study provides evidence that existing standards may actually facilitate earnings management . In addition , the conflicting influence of the client and the Securities Exchange Commission affect the auditors' decision making and interpretation of GAAP . These issues were examined by providing auditors with a research instrument that required them to assess an accounting transaction that is used to manage earnings and determine the appropriate amount of expense . Three variables of interest were manipulated in this study : (1 ) the type of GAAP , (2 ) management explanation , and (3 ) the SEC notification of potential investigation due to earnings management . The client desired additional expenses in the current year to offset higher than expected revenues from a new product . The type of GAAP was operationalized as (I ) a write -down of impaired assets which reflects a broad financial accounting standard and (2 ) the expensing of additional supplies that were acquired but unused which reflects a strict accounting principle , matching . Management explanation was operationalized as (1 ) a high persuasive explanation to record a large amount of loss or expense to achieve analysts' projections of earnings and (2 ) a low persuasive explanation to achieve steady long -term growth in earnings and fair presentation within the financial statements . The potential conflicting influence of the SEC was operationalized by the absence or presence of the January 22 , 1999 notification of the SEC's intent to audit the financial statements due to asset write -downs , restructuring activities , or acquired in -process research and development .
URI: http : / /hdl .handle .net /2346 /12651
Date: 2003-08

Citation

Segovia, Joann R Earnings Management: do the type of GAAP, persuasive client explanation, and SEC notification influence the auditors' decisions?. Doctoral dissertation, Texas Tech University. Available electronically from http : / /hdl .handle .net /2346 /12651 .

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