Question:
An article published in Accounting Horizons describes various techniques that companies use to manage
their earnings.
Required:
In your library or from some other source, locate the article “How Are Earnings Managed? Evidence from
Auditors” in Accounting Horizons, 2003 (Supplement), and answer the following questions:
1. What are the four most common revenue-recognition abuses identified by auditors in that article? From
the examples provided in the article, briefly explain each abuse.
2. What is the revenue-recognition abuse identified in the article related to the percentage-of-completion
method?
3. Did revenue-recognition abuses tend to increase or decrease net income in the year they occurred?
4. Did auditors tend to require their clients to make adjustments that reduced the revenue-recognition
abuses they detected?
Answer:
(Note: This case requires the student to reference a journal article.)
1.
Abuse Expanation
1. Cutoff manipulation The company either closes their books early (so some current-year
revenue is postponed until next year) or leaves them open too long
(so some next-year revenue is included in the current year).
2. Deferring too much or too The company has an arrangement under which revenue should be
An article published in Accounting Horizons describes various techniques that companies use to manage
their earnings.
Required:
In your library or from some other source, locate the article “How Are Earnings Managed? Evidence from
Auditors” in Accounting Horizons, 2003 (Supplement), and answer the following questions:
1. What are the four most common revenue-recognition abuses identified by auditors in that article? From
the examples provided in the article, briefly explain each abuse.
2. What is the revenue-recognition abuse identified in the article related to the percentage-of-completion
method?
3. Did revenue-recognition abuses tend to increase or decrease net income in the year they occurred?
4. Did auditors tend to require their clients to make adjustments that reduced the revenue-recognition
abuses they detected?
Answer:
(Note: This case requires the student to reference a journal article.)
1.
Abuse Expanation
1. Cutoff manipulation The company either closes their books early (so some current-year
revenue is postponed until next year) or leaves them open too long
(so some next-year revenue is included in the current year).
2. Deferring too much or too The company has an arrangement under which revenue should be
