An Assessment of the Change in the Incidence of Earnings Management Around the EnronAndersen Episode

An Assessment of the Change in the Incidence of Earnings Management Around the EnronAndersen Episode In 2001 Enron filed amended financial statements setting off a chain of events starting with its bankruptcy filing and including the conviction of Arthur Andersen for obstruction of justice. The end of 2001 and the first half of 2002 included a heightened level of publicity for the accounting practices of listed companies. This paper addresses whether there was a detectable change in the incidence of earnings management around this time period. Earnings reports released in 2001 and 2002 were analyzed. The results showed that revenue numbers were subject to upwards management. Benford's Law was used to detect such manipulations. Earnings Per Share EPS numbers showed a marked discontinuity in the distribution around zero which is consistent with upwards management. The results also showed a tendency towards neat round EPS numbers such as 0.10, 0.20, etc. The overall results are consistent with a small but noticeable increase in earnings management in 2002. Enron's reported numbers are reviewed and these show a strong tendency towards making financial thresholds. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Accounting and Finance Emerald Publishing

An Assessment of the Change in the Incidence of Earnings Management Around the EnronAndersen Episode

Review of Accounting and Finance, Volume 4 (1): 19 – Jan 1, 2005

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Publisher
Emerald Publishing
Copyright
Copyright © Emerald Group Publishing Limited
ISSN
1475-7702
DOI
10.1108/eb043420
Publisher site
See Article on Publisher Site

Abstract

In 2001 Enron filed amended financial statements setting off a chain of events starting with its bankruptcy filing and including the conviction of Arthur Andersen for obstruction of justice. The end of 2001 and the first half of 2002 included a heightened level of publicity for the accounting practices of listed companies. This paper addresses whether there was a detectable change in the incidence of earnings management around this time period. Earnings reports released in 2001 and 2002 were analyzed. The results showed that revenue numbers were subject to upwards management. Benford's Law was used to detect such manipulations. Earnings Per Share EPS numbers showed a marked discontinuity in the distribution around zero which is consistent with upwards management. The results also showed a tendency towards neat round EPS numbers such as 0.10, 0.20, etc. The overall results are consistent with a small but noticeable increase in earnings management in 2002. Enron's reported numbers are reviewed and these show a strong tendency towards making financial thresholds.

Journal

Review of Accounting and FinanceEmerald Publishing

Published: Jan 1, 2005

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