Does Realization of Earnings Forecast Result in Fraudulent Financial Reporting?

Baran REZAI, Hassan Farajzadeh DEHKORDI
1.686 518

Abstract


This article studies a situation in which corporate managers publish fraudulent financial statements facing the risk of non-realization of management earnings forecast. In particular, if the managers fail to realize the earnings forecast through other common methods in use, they will try to use unauthorized methods, especially using opportunistic restatement, to enhance the reported earnings to the forecasted level. One thing that may indicate management restrictions in using conventional methods to achieve forecasted earnings is bloated balance sheet. Bloated balance sheet is realized through the use of discretionary accruals in the previous period and the accumulation of these items in the net operating assets of the firm.To test this prediction, data from 240 companies, including 2,200 firm-year observations during the 2001-2012 and logistic regression were used.The results show that at time when corporate balance sheets is bloated by the use of discretionary accruals,the possibility of increased restatements (initial reported earnings higher than restated earnings) as well as opportunistic restatement (restatements led to the realization of forecasted earnings) increases so as the companies avoid a negative unexpected earnings report.


Keywords


Opportunistic restatement, fraudulent financial reporting, management forecast, negative unexpected forecast

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References


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