It is an often debated contention that managers have the power, within GAAP, to manipulate earnings. The objective of earnings management is to provide investors with a smooth, regular, hopefully increasing pattern of reported earnings.
Questions:
1. Here is a link to a CPA Journal article that discusses earnings management. Read the article and answer the following questions:
a. What are the five popular examples of earnings management techniques identified by Arthur Levitt, former chair of the SEC?
b. How does the SEC define abusive earnings management practices?
c. In addition to the objective of reporting a smooth, regular, hopefully increasing pattern of reported earnings, what is another typical motivation for practicing earnings management?
d. Identify the author's suggestions for detecting earnings management.
2. There has been considerable discussion of the disclosure by companies of "pro forma earnings" as another technique used to manage earnings. Read this online article and answer the following questions:
a. What is meant by the term "pro forma earnings?"
b. Describe recent legislation that addresses the issue of pro forma earnings disclosure.
c. Agilent
Technologies, Inc. is a global diversified technology company that provides enabling
solutions
to high growth markets within the communications, electronics and life sciences
industries. For the quarter ended July 31, 2005, the company reported net income of $104
million. Agilent also disclosed that its pro forma earnings for the period were $142
million. Access this
online company press release and describe the differences between reported earnings (loss)
and pro forma earnings (loss).
Here is the solution to this case.