Assessing Accounting Quality: Issues

Related Earnings Management

ACC 411
Financial Statement Analysis
Winter 2017

Professor Charles E. Wasley

Simon School of Business

University of Rochester

Professor Charles E. Wasley 1

 Learning Objectives

1) To appreciate the myriad of factors influencing Accounting Quality.

2) To appreciate what earnings management is, why we should worry

about it, how we know it occurs, what managers perceive the rewards from
it are, and what it signals about a firm.

3) To understand the five classifications of earnings management

techniques as well as the individual actions within classifications that
managers can take to manage earnings.

4) To recognize the red flags that serve as useful screens for potential
cases of earnings management.

5) To appreciate how to identify potential cases of earnings management,

that is, of low quality accounting numbers.

Professor Charles E. Wasley 2

Under GAAP (and IFRS), Managers Have Some
Discretion When Selecting the Accounting
Methods to Report Their Firms Operating
Performance and Financial Position
Why?

Accrual accounting provides managers with discretion in the reporting of earnings

(and other financial statement numbers) so as to allow financial reports to reflect
managerial information about a firms underlying economic conditions more
accurately than would a uniform mechanical reporting rule.

However, if in some circumstances (e.g., time periods) managers wish to mislead

investors, the discretion they have applying GAAP (IFRS) provides them with the
means to obscure their firms true underlying economic performance.

Such incentives to manage earnings may be especially strong when the firm is
planning to sell shares to the market, as in an initial public offering or via a
secondary stock offering, if the firm has yet to report a profit, or when the firm is
or has been performing poorly.
Professor Charles E. Wasley 3
 Factors Influencing Accounting
Quality
(At least) 3 factors influence the quality of a firms financial statement (i.e.,
accounting) numbers.
1) Noise from GAAP (IFRS) accounting rules.
The fit between GAAP (IFRS) and the nature of a firms business activities and its
economic environment is not perfect and may introduce noise into the financial
statements when managers attempt to use the financial statements to report on the
firms performance.
2) Management forecast errors (i.e., honest mistakes):
Managers cannot perfectly forecast future events so some of their estimates will turn
out to be wrong (e.g., rates of uncollectible A/R, warranty rates, useful lives etc.).
3) Managers strategic choice of GAAP (IFRS) (i.e., managerial opportunism):
As discussed below, managers incentives to choose accounting policies that are
biased, that is, designed to put a positive spin on the firms results and financial
position.
Such incentives include debt covenants, compensation contracts, corporate control contests,
tax and regulatory considerations, capital market and stakeholder considerations, as well as
competitive industry considerations.
Professor Charles E. Wasley 4
What is Earnings Management?

Earnings management are purposeful actions taken by managers to intentionally

distort/misstate a firms reported profitability and/or financial position. The objective is
invariably to put a positive spin on the firms results.
More specifically, managers take actions, that is, make financial reporting decisions, that
increase current-period earnings by increasing current-period revenue (or gains) or by
decreasing current-period expenses.
Alternatively, managers may take actions, that is, make financial reporting decisions, that
decrease current-period earnings (i.e., that increase future periods' earnings) by
decreasing current-period revenue or by increasing current-period expenses.

Note that earnings management takes place within the confines of GAAP (IFRS) where
managers are strategic and sometimes aggressive/opportunistic in their choice of
accounting policies and financial reporting decisions.
Earnings management is not fraud. When managers commit fraud they havent been
applying GAAP (IFRS) aggressively or strategically, they were not following GAAP at all.

Earnings management that inflates Sales is especially problematic because forecasts

of future performance (i.e., the first step in equity valuation) typically starts with
projections of future Sales and other forecasted numbers are a function of such Sales
projections. Professor Charles E. Wasley 5
Why Worry About Earnings
Management?
Some earnings management practices are more harmful than others

Because, many earnings management practices dont impact a firms actual cash flows.
Examples include changing useful lives or manipulating bad debt or warranty accruals.
These actions are of concern, but less so than earnings management practices that affect cash flows.

On the other hand, some earnings management practices affect the firms cash flows and such
actions are of more concern than those above.
Examples include cutting R&D and/or advertising, selling appreciated assets to recognize one-time
gains that are taxable.

A key reason to be concerned about earnings management is that when earnings are managed, it
is more difficult for financial statement users like us to get a true picture of a firms real underlying
economic performance, and it is that performance that we are interested in.

As a result, financial statement users like us have to be concerned about earnings management
and develop ways to identify when earnings management may be occurring and how to unravel it.

In this course we cover a number of techniques that are useful in detecting earnings management
and undoing it.
Professor Charles E. Wasley 6
What Does Earnings Management
Signal?

Earnings management is not typically a signal of strength.

Because the most likely time to manage earnings is when the firm is
performing poorly.

Managers that manage earnings are usually attempting to

cover-up a major deterioration in the firms underlying
business activities.
The truth eventually becomes known to investors and the stock price
declines accordingly.

Earnings management may lead investors to lose faith in

management's integrity.
As a result, the firms stock may remain out of investors favor for a
long time.
Professor Charles E. Wasley 7
 What Rewards Do Managers
Perceive There to be Associated with
Managing Earnings?
Stock price (i.e., equity market) effects?
Higher stock prices, reduced stock-price volatility, lower cost of equity capital, increased value of
executive stock options, avoid drops in stock price when consensus analyst forecasts is missed, and/or
higher initial public offering and secondary offering prices?

Borrowing cost effects (i.e., debt market effects)?

Higher debt ratings, lower borrowing costs (i.e., interest rates), less stringent debt covenants and/or
avoid adverse effects of (i.e., the costs associated with) violating debt covenants?

Bonus plan effects?

Increased earnings-based bonuses for top executives?

Political cost effects?

Decreased regulation, avoid higher taxes and/or minimize political costs by avoiding what might be
viewed as reporting excessive profits.

Labor Market effects?

Higher Earningssignal a better CEO?
Professor Charles E. Wasley 8
Bonus Plan Effects

The graph on the following slide depicts the functional form of a typical earnings-based
bonus plan for top executives (i.e., CEOs and CFOs).

The performance measure on the x-axis is usually accounting earnings or something that is
a function of accounting earnings like return on equity.

The way the bonus works is quite simple. Below a lower bound of the performance measure
called the performance threshold there is no bonus. Once the performance measure
reaches the performance threshold the bonus increases in the performance measure.
Once the performance measure hits an upper bound, the bonus is capped.

The key area in the graph is the incentive zone because it is in this area that increases in
the performance measure (e.g., earnings) have the greatest effect on executives bonuses.

Describe the incentives managers have to manage earnings upward or downward when they
are below the performance threshold; in the incentive zone; and above the upper bound of
the bonus cap.

Professor Charles E. Wasley 9

Structure of the Typical Earnings-
Based Bonus Plan

Professor Charles E. Wasley 10

Five Broad Classifications of Earnings
Management Techniques

1) Recognizing Premature Revenue:

Sales belonging in future years are accelerated to improve current-year
income.
For example, channel-stuffing, recording Sales when future services remain to be
provided, recording Sales before shipment or before a customer's acceptance, or
recording Sales even though the customer is not obligated to pay.

2) Aggressive Capitalization of Expenses (i.e., understating expenses):

Capitalize (some) expenses as assets rather than immediately expensing them
in the income statement.
For example, pre-opening costs of retailers, membership acquisition costs, direct
advertising costs, and/or software development expenses, among others.

3) Extended Amortization Policies (i.e., understating expenses):

Use excessively long depreciation/amortization periods for long-term assets.
Professor Charles E. Wasley 11
Five Broad Classifications of Earnings
Management Techniques

4) Overvaluation of Assets:
A/R, inventory and investments (etc.) are carried at valuations above
realizable amounts.
For example, the allowance for doubtful accounts might be too small or
management may postpone a write-down of obsolete inventory. The
postponement of an inventory write-down boosts current earnings, while
future earnings will be reduced when the inventory account is adjusted.
Maybe after the current management is gone (retired).

5) Undervaluation of Liabilities:
For example, warranty liabilities are too low. Current earnings are
increased as a result, while the earnings of future years will be reduced
when the liabilities are later increased as needed.

Professor Charles E. Wasley 12

Detecting Earnings Management?
Some Simple Screening Techniques
and Potential Red Flags
Watch for:
Excessive charges shortly after a new CEO arrives? Think about why?
Unexplained and unexpected declines in allowances/reserves? Think about
why?
A/R growing faster than Sales. Think about why?
Unexplained increases in A/R days outstanding. Think about why?
Gross margins growing at an unrealistic pace. Think about why?
Big unexplained increases in soft assets on the balance sheet. Think about
why?
Big unexplained decreases in deferred revenue on the balance sheet. Think
about why?
Operating Cash Flows consistently lagging behind Net Income. Think about
why?
Unexplained increases in days inventory held. Think about why?
Other Current Assets and/or Other Assets growing faster than Sales. Think
about why?
Big explained improvements in SG&A as a percent of sales. Think about why?
Professor Charles E. Wasley 13
Detecting Earnings Management?
Some Simple Screening Techniques
and Potential Red Flags
Use ratio and trend analysis to identify unusual relationships and trends.
Think about why?

Scrutinize footnotes related to special/restructuring charges. Think about

why?

Read footnotes describing unusual gains in periods of weak operating

performance. Think about why?

Review changes in accounting methods without clear justification and those

that differ from the industry. Think about why?

Review explanations for reversals of restructuring charges taken in prior years

that are now being reversed back into income. Think about why?

Read the accounting policies footnote in the firms annual report and compare
it to the previous year too identify any (subtle) changes. Think about why?
Professor Charles E. Wasley 14
Detecting Earnings Management Using a
Scientific Approach: A Model of Earnings
Management/Manipulation
Beneish (1999) developed a model to identify the financial characteristics of firms
likely to have engaged in earnings manipulation/management.

The model was developed using firms subject to SEC enforcement actions and
involved identifying the characteristics (e.g., various financial ratios) of firms likely
to have manipulated/managed earnings.

In the model, the value of y is as follows (the following slides define and
describe the variables used in the model):

y = -4.840 + 0.920(DSRI) + 0.528(GMI) + 0.404(AQI) + 0.892 (SGI) + 0.115

(DEPI) - 0.172 (SAI) - 0.327 (LVGI) + 4.670 (TA_TA).

The statistical model used is a probit model which converts the value of y into
a probability based on the standardized normal distribution (the command
NORMSDIST in Excel, when applied to a particular value of y, converts it to the
appropriate probability).
Professor Charles E. Wasley 15
The Variables in the Model:
Calculation and Economic Intuition

1) Days Sales in Receivables Index (DSRI): Is the ratio of A/R to Sales at the end of the current year to
the same ratio of the preceding year. A large increase in A/R as a percentage of Sales may indicate an
over-statement of A/R and Sales in the current year to boost earnings. Such an increase might result
from channel-stuffing or from liberalizing credit terms to boost sales. Thus, a higher value implies a
higher probability of earnings manipulation, so the coefficient on this variable should be positive.

2) Gross Margin Index (GMI): Is the ratio of gross profit (Sales-CGS) to Sales last year to that for the
current year. A decline in the gross margin percentage will result in an index greater than 1.0 and firms
with weaker profitability this year are more likely to engage in earnings manipulation. As a result, a
higher value implies a higher probability of earnings manipulation, so the coefficient on this variable
should be positive.

3) Asset Quality Index (AQI): Asset quality refers to the proportion of total assets composed of assets
other than current assets, PP&E and investments in securities. The remaining assets include intangibles
and other assets whose future benefits are less certain. The asset quality index equals the proportion of
these lower-quality assets in the current year relative to the preceding year. An increase in the
proportion suggests an increased effort to capitalize and defer costs the firm should have expensed. As
a result, a higher value implies a higher probability of earnings manipulation, so the coefficient on this
variable should be positive.

4) Sales Growth Index (SGI): Is the ratio of Sales for the current year to Sales of the preceding year.
While growth in Sales does not necessarily imply manipulation, growing firms usually rely on external
financing more than mature firms and the need for financing might motivate managers to manipulate
sales (as well as earnings). As a result, a higher value implies a higher probability of earnings
manipulation, so the coefficient on this variable should be positive.
Professor Charles E. Wasley 16
The Variables in the Model:
Calculation and Economic Intuition
5) Depreciation Index (DEPI): Is depreciation expense as a percentage of Net PP&E before
depreciation for the preceding year relative to the same percentage for the current year. A ratio
greater than 1.0 indicates that the firm has slowed the rate of depreciation (perhaps by lengthening
useful lives), thereby increasing earnings. Thus, a higher value implies a higher probability of
earnings manipulation, so the coefficient on this variable should be positive.

6) Selling and Administrative Expense Index (SAI): Is the ratio of SG&A to Sales for the current year
to the same percentage for the preceding year. An index less than 1.0 suggests the firm may be
manipulating earnings by capitalizing various costs instead of expensing them. As a result, a lower
value implies a higher probability of earnings manipulation, so the coefficient on this variable should
be negative.

7) Leverage Index (LVGI): Is the proportion of total financing composed of current liabilities and long-
term debt for the current year relative to the same proportion for the preceding year. An increase in
the proportion of debt likely subjects a firm to a greater risk of violating debt covenants and the need
to manipulate earnings to avoid any violation. As a result, a higher value implies a higher probability
of earnings manipulation, so the coefficient on this variable should be positive.

8) Total Accruals to Total Assets (TA_TA): Total accruals is the difference between income from
continuing operations and cash flow from operations. This variable is an indicator of the extent to
which earnings results from accruals instead of cash flows. A large excess in income from continuing
operations over cash flow from operations indicates that accruals are playing a large part in
measuring income, and accruals can be manipulated much easier than cash flows. Thus, a higher
value implies a higher probability of earnings manipulation, so the coefficient on this variable should
be positive. Professor Charles E. Wasley 17
The Earnings Manipulation
Model

Under the model the value of y is as follows (as noted above we convert
the y into a probability based on the standardized normal distribution by
using the command NORMSDIST in Excel):

y = -4.840 + 0.920(DSRI) + 0.528(GMI) + 0.404(AQI) + 0.892 (SGI) +

0.115 (DEPI) - 0.172 (SAI) - 0.327 (LVGI) + 4.670 (TA_TA).

The signs of all the coefficients (except leverage) are consistent with our
discussion/predictions on the prior slides.

The coefficient on leverage is negative, opposite of what we expected.

Perhaps a decrease in the proportion of debt in the capital structure is

evidence of a decreased ability to obtain funds from borrowing and the
need to engage in earnings manipulation to portray a healthier firm to
obtain such financing.
Professor Charles E. Wasley 18
The Trade-Off Between Type I and
Type II Errors When Applying the
Earnings Manipulation Model
Selecting a cutoff probability to signal earnings manipulation involves trading-off Type I
and Type II errors.

A Type I error involves failing to identify a firm as an earnings manipulator when it turns
out to be one. A Type II error involves identifying a firm as an earnings manipulator when
it turns out not to be one.

Usually Type I errors are more costly to investors than Type II errors. The key issue here is
that the cutoff probability depends on the investors/analysts view of the relative cost of
Type I and Type II errors. That is, how much more costly is it to classify an actual earnings
manipulator as a non-manipulator than to classify an actual non-manipulator as a
manipulator?
A Type I error can result in an investor losing all of the investment in a firm when the manipulation
comes to light.
Misclassifying an actual non-manipulator results in the investor losing the return that would have
been earned on that investment.

Thus, as with bankruptcy prediction, Type I errors are more costly.

If an investment makes up a small proportion of an investors diversified portfolio, then a Type I
error is less costly than if the investment comprises a more significant proportion of a less diversified
portfolio of investments.
Professor Charles E. Wasley 19
The Trade-Off Between Type I and
Type II Errors When Applying the
Earnings Manipulation Model
Cutoff probabilities for various mixtures of Type I
and Type II error costs are as follows:

Cost of Type I Error

Relative to Type II Error Cutoff Probability
10:1 6.85%
20:1 3.76%
30:1 3.76%
40:1 or higher 2.94%
Professor Charles E. Wasley 20
Application of the Earnings
Manipulation Model to Wal-Mart
and Target
The following two slides report the results of applying the
Earnings Manipulation Model to Wal-Mart and Target.

Examine the results.

What observations would you make?

Anything unusual?

Professor Charles E. Wasley 21

 Application of the Earnings
Manipulation Model to Wal-Mart

Wal-Mart Stores, Inc.

FISCAL YEAR ENDED (MOST RECENT YEAR FIRST) 31-Jan-2014 31-Jan-2013 31-Jan-2012 31-Jan-2011 31-Jan-2010 31-Jan-2009 31-Jan-2008 31-Jan-2007
EARNINGS MANIPULATION ANALYSIS:
BENEISH'S MANIPULATION INDEX

"y" = -4.84 + 0.92(DSRI) + 0.528(GMI) + 0.404(AQI) +

0.892(SGI) + 0.115(DEPI) -0.172(SAI) - 0.327(LVGI) +
4.67(TATA)

DAYS' SALES IN RECEIVABLES INDEX 0.97072 1.08611 1.10220 1.18797 1.05124 0.99999 1.18493 0.98809

GROSS MARGIN INDEX 1.00022 1.00595 1.01467 1.00545 0.97389 0.99284 0.98325 0.98477

ASSET QUALITY INDEX 0.96106 0.96600 1.16805 0.98131 1.02227 1.01126 1.06825 0.89326

SALES GROWTH INDEX 1.01631 1.04959 1.05846 1.03373 1.00948 1.07223 1.08225 1.11620

DEPRECIATION INDEX 0.97061 0.99390 0.98000 0.98847 1.00663 0.93018 0.94963 0.96834
SALES, GENERAL AND ADMINISTRATIVE INDEX 1.01419 0.99314 0.98732 0.98732 1.01835 1.01957 1.02584 1.02694

LEVERAGE INDEX 0.99782 0.98582 0.99800 1.05027 0.98043 0.97938 1.02769 0.95737

TOTAL ACCRUALS TO TOTAL ASSETS -0.03604 -0.04256 -0.04413 -0.04585 -0.06925 -0.06065 -0.04757 -0.05308

SEE THE LECTURE NOTES FOR THE VARIABLE

DEFINITIONS

THE VALUE OF "y" IS: -2.681 -2.561 -2.464 -2.511 -2.749 -2.703 -2.459 -2.681

EARNINGS MANIPULATION PROBABILITY IS: 0.548% 0.751% 0.959% 0.852% 0.456% 0.517% 0.970% 0.549%

CUTOFF PROBABILITIES GIVEN TYPE I AND TYPE II

ERROR TRADE-OFFS:

CUTOFF
COST OF TYPE I ERROR RELATIVE TO TYPE II ERROR: PROBABILITY
10:1 6.85%
20:1 3.76%
30:1 3.76%

Professor Charles E. Wasley 22

40:1 (OR HIGHER) 2.94%
Application of the Earnings
Manipulation Model to Target
Target Corporation
FISCAL YEAR ENDED (MOST RECENT YEAR FIRST) 01-Feb-2014 02-Feb-2013 28-Jan-2012 29-Jan-2011 30-Jan-2010 31-Jan-2009 02-Feb-2008 03-Feb-2007 28-Jan-2006
EARNINGS MANIPULATION ANALYSIS:
BENEISH'S MANIPULATION INDEX

"y" = -4.84 + 0.92(DSRI) + 0.528(GMI) + 0.404(AQI) +

0.892(SGI) + 0.115(DEPI) -0.172(SAI) - 0.327(LVGI) +
4.67(TATA)

DAYS' SALES IN RECEIVABLES INDEX 0.00000 0.00000 0.92915 0.85664 0.85631 0.97929 1.22073 0.96694 0.99497

GROSS MARGIN INDEX 1.05031 1.01558 1.02071 1.01350 0.98248 1.00755 0.99669 1.04596 0.00000

ASSET QUALITY INDEX 1.39219 1.03858 0.88570 1.28067 0.90684 0.57363 1.25919 0.59518 0.89073

SALES GROWTH INDEX 0.99038 1.04918 1.03673 1.03111 1.00630 1.02495 1.06517 1.13056 1.12342

DEPRECIATION INDEX 0.98724 1.04305 1.10926 0.98047 0.89349 0.97303 1.01294 1.05608 1.00835
SALES, GENERAL AND ADMINISTRATIVE INDEX 1.04092 1.00772 1.01019 0.99883 1.00325 0.99753 1.00361 0.93727 1.01625

LEVERAGE INDEX 0.96324 0.99549 1.02271 0.98935 0.93534 1.05137 1.13953 0.99132 1.00050

TOTAL ACCRUALS TO TOTAL ASSETS -0.10319 -0.04850 -0.05379 -0.05379 -0.07619 -0.05024 -0.02864 -0.05556 -0.05838

SEE THE LECTURE NOTES FOR THE VARIABLE

DEFINITIONS

THE VALUE OF "y" IS: -3.702 -3.554 -2.795 -2.713 -3.001 -2.899 -2.294 -2.773 -3.221

EARNINGS MANIPULATION PROBABILITY IS: 0.021% 0.036% 0.401% 0.502% 0.221% 0.298% 1.435% 0.427% 0.111%

CUTOFF PROBABILITIES GIVEN TYPE I AND TYPE II

ERROR TRADE-OFFS:

CUTOFF
COST OF TYPE I ERROR RELATIVE TO TYPE II ERROR: PROBABILITY
10:1 6.85%
20:1 3.76%

Professor Charles E. Wasley 23

30:1 3.76%
40:1 (OR HIGHER) 2.94%
Application of the Earnings
Manipulation Model to
Amazon.com
The following slide contains the results of applying the
Earnings Manipulation Index to Amazon.com for years YY09,
YY10 and YY11.

Notice that the results for YY09 indicate a very high

probability of earnings management.

Briefly discuss the nature of any potential earnings

management by Amazon.com in YY09.

Professor Charles E. Wasley 24

 AMAZON YY08 YY09 YY10 YY11 Weighted Predictor Ratios YY09 YY10 YY11
Accounts Receivable $21,308 $79,643 $86,044 $67,613 Days Receivables Index 1.27877 0.590121 0.639478
Current Assets $424,254 $1,006,477 $1,361,129 $1,207,920 Gross Margin Index 0.652959 0.394149 0.49018
Prop. Plant & Eq-Net $29,791 $317,613 $366,416 $271,751 Asset Quality Index 0.62394 0.166571 0.204022
Total Assets $648,460 $2,465,850 $2,135,169 $1,637,547 Sales Growth Index 2.39864 1.502397 1.00841
Current Liabilities $161,575 $733,234 $974,956 $921,414 Depreciation Index 0.266057 0.063754 0.090651
Long-term Debt $348,140 $1,466,338 $2,127,464 $2,156,133 Sell. & Admin. Exp. Index -0.236225 -0.173122 -0.121224
Sales $609,819 $1,639,839 $2,761,983 $3,122,433 Leverage Index -0.371086 -0.532653 -0.422951
Cost of Goods Sold $476,155 $1,349,194 $2,106,206 $2,323,875 Total Accruals/Total Assets -1.19372 -2.80681 -1.24857
Selling & Admin. Exp. $242,719 $896,400 $1,519,657 $1,210,815 Constant -4.84 -4.84 -4.84
Income fropm Cont. Oper. -$124,546 -$719,968 -$1,411,273 -$556,754 Value of y -1.42066 -5.63559 -4.20001
Cash Flow from Oper. $31,035 -$90,875 -$130,442 -$119,782
Depreciation $9,421 $36,806 $84,460 $84,709 Probability of Manipulaton 7.771% 0.000% 0.001%
BENEISH'S MANIPULATION INDEX

"y" = -4.84 + 0.92(DSRI) + 0.528(GMI) + 0.404(AQI) +

0.892(SGI) + 0.115(DEPI) -0.172(SAI) - 0.327(LVGI) +
4.67(TATA)
Professor Charles E. Wasley 25
 Application of the Earnings
Manipulation Model to
Amazon.com
The YY09 probability of 7.77% is a false signal of earnings manipulation in this case. The
reason is that the Days Receivable Index of 1.27877 is unduly influencing the estimated
probability. Since virtually all of Amazons sales are in cash we could/should revise the
estimate by inserting 0.0 in place of the value above.

To see the effect, recalculate the probability of earnings manipulation (note, I gave you
the formula in the table) after inserting 0.0 for the Days Receivable Index. The probability
of earnings manipulation will drop to 0.347% (which is trivial).

While you may have been tempted to focus on the Sales Growth Index of 2.39864, that
would have been a bit misguided, because virtually all of Amazons sales are made in
cash, and we are concerned with credit (not cash) sales being used to manage earnings.

This was a good example to study because it reminds us that we have to be careful about
mechanically applying models and/or calculating ratios, etc., given the underlying
economics of a firms business model.
Professor Charles E. Wasley 26
Summary

On-going revelations of corporate financial reporting abuses

add to the importance of assessing whether firms have
intentionally manipulated/managed earnings.

The methods of analysis discussed in these lecture notes

provide a means to assess whether firms may have
intentionally manipulated/managed earnings.

Professor Charles E. Wasley 27