Does Realization of Earnings Forecast Result in Fraudulent Financial Reporting?
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.
Heidarpour,F., and KhajehMahmoud, Z.(2014). The correlation between thecharacteristics of themanagementearningsforecast per shareon therisk andvalue of the firmwith the aim offoresightindecision-making,FinancialKnowledge of ExchangeAnalysis,7thyear, no.22,pp. 25-46.
Maham, K., and Zolghadr, M.(2012). The correlation between management earnings forecastandearnings management, Financial Accounting Research, 2nd year,no.4,pp. 65-87.
Rahmani, A., Bashirimanesh, N., Shahrokhi, S.S.(2012). Effect ofpublication ofearnings forecasts on future interest rate reactions, Knowledge of Accounting, 3rdyear, no. 10, pp.29- 50.
Barton, J. and Simko, P. (2002), The balance sheet as an earnings management constraint, The Accounting Review, 77(S-1), 1-27.
Bartov, E., Givoly, D. and Hayn, C. (2002), The rewards to meeting or beating earnings expectations”, Journal of Accounting and Economics, 33(2), 173-204.
Brown, L. (1997), Analyst forecasting errors: additional evidence, Financial Analysts Journal, 53(6), 81-8.
Brown, L. and Pinello, A. (2007), To what extent does the financial reporting process curb earnings unexpected games?, Journal of Accounting Research, 45(5), pp. 947-81.
Burgstahler, D. and Eames, M. (2006), Management of earnings and analysts’ forecasts to achieve zero Finance&Accounting, 33(5/6), 633-52. small positive earnings surprises, Journal of Business
Badertscher, B.A.; Collins, D.W.; Lys, T.Z. (2012). Discretionary accounting choices and the predictive ability of accruals with respect to future cash flows. Journal of Accounting and Economics, 53(1-2), 330-352.
Doyle, J.T., Jennings, J.N., and Soliman, M.T. (2013). Do managers define non-GAAP earnings to meet or beat analyst forecasts? Journal of Accounting and Economics, 56(1), 40– 56.
Gunny, K., (2010). The relation between earnings management using real activities manipulation and future performance: evidence from meeting earnings benchmarks. Contemporary Accounting Research, 27(3), 855–888.
Healy, P. and Wahlen, J. (1999), A review of the earnings management literature and its implications for standard setting, Accounting Horizons, 13(4), 365-83.
Ho, L.J., Liu C.S., Ouyang, B. (2012), Bloated balance sheet, earnings management, and forecast guidance, Review of Accounting and Finance, 11(2), 120 – 140.
Kasznik, R. and McNichols, M. (2002), Does meeting earnings expectations matter? Evidence from analyst forecast revisions and share prices, Journal of Accounting Research, 40(3), 727-59.
Matsumoto, D. (2002), Management’s incentives to avoid negative earnings surprises, The Accounting Review, 77(3), 483-514.
Roychowdhury, S. (2006), Earnings management through real activities manipulation, Journal of Accounting and Economics, 42(3), 335-70.
Schipper, K. (1989), Commentary on earnings management, Accounting Horizons, 3(4), 91- 102.
Skinner, D. and Sloan, R. (2002), Earnings surprises, growth expectations, and stock returns or don’t let an earnings torpedo sink your portfolio, Review of Accounting Studies, 7(2-3), 289-312.