6 ACC 453 Exam - Earnings Management and Fraud Risk

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5 Terms

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Earnings Management

= When companies use opportunities that are available to them to make
accounting decisions that can influence the reported income

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Why Earnings Management?

Alter reported income

• Enhancing managerial performance evaluations and increasing bonuses

• Maintaining high stock prices and reducing market share price volatility (e.g.,

earnings smoothing)

• Concealing financial problems from the Board and the capital markets.

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Channel stuffing

ending retailers products in advance or at greater

amounts than they can sell to increase sales (e.g., Krispy Kreme

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Roundtripping

selling an asset while also agreeing to buy it back in the
future (shows fictitious growth without profit) (e.g., Enron’s SPEs

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Cookie Jar

purposefully taking reserves from a successful year to cover

poor years in the future (e.g., WorldCom, Dell