21. Managing Earnings

Mark W. Nelson, Johnson Graduate School of Management, and colleagues, John Elliott (Baruch College) and Robin Tapley (George Washington University), conducted a study in which they contacted more than 250 experienced auditors to identify how managers attempt to manage earnings, and when auditors are more likely to require managers to adjust such attempts before certifying the accuracy of financial statements. The study showed that managers most often attempt to manage liability reserves and revenues, and that auditors are more likely to require adjustment of revenues than reserves. The research sheds light on the determinants of aggressive accounting; for example, helping to explain why reserve misstatements were the leading cause of restated financial statements in 2003.

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