How Are Earnings Managed? Examples from Auditors

This paper reports descriptive evidence about how managers attempt to manage earnings, based on a sample of 515 earnings-management attempts obtained from a survey of 253 experienced auditors. It classifies attempts first according to primary approach: expense recognition, revenue recognition, issues unique to business combinations, and other issues. Then, within each of those broad categories, it subclassifies attempts by the particular approach used in the attempt. For each specific approach, it reports the accounts involved, the frequency with which the approach increased or decreased current-period income (and the frequency of adjustments required by the auditor), and provides descriptions by auditors of income-increasing and income-decreasing examples of the more frequent approaches. Findings are also linked to recent SEC Accounting and Auditing Enforcement Releases that illustrate extreme versions of the specific approaches identified by participants.