Degree Type
Honors Capstone Project
Date of Submission
Spring 5-1-2005
Capstone Advisor
Professor Randy Elder
Honors Reader
Professor Susan Albring
Capstone Major
Accounting
Capstone College
Management
Audio/Visual Component
no
Capstone Prize Winner
no
Won Capstone Funding
no
Honors Categories
Social Sciences
Subject Categories
Accounting
Abstract
Since the turn of the century it has become undeniably apparent that many corporations, regardless of their size, have resorted to falsifying financial records in an attempt to mask the true financial health of the company. The reasons for such actions vary from attempts to shore up investor confidence to ensuring perks for corporate executives. These scandalous acts are not a characteristic of a certain type of business. They have occurred across a wide array of businesses including, but not limited to, power and energy, insurance, and telecommunications.
The most common form of record falsification comes in the form of abusive earnings management. The recent Enron debacle brought this fraudulent activity to the forefront. Enron’s auditor, Arthur Andersen, was found guilty of obstruction of justice in light of document shredding during the federal investigation. It was determined that Andersen elected to disregard evidence of falsification in order to maintain their lucrative auditing/non-auditing fee agreement with Enron. This spurred the birth of the Sarbanes Oxley Act of 2002.
This thesis was developed based on the theory that there is a correlation between earnings management practices and non-auditing fees incurred by the respective companies. When audit firms receive large amounts in non-audit fees from their clients, they are likely to be less independent and more likely to allow firms to manage their earnings. I elected to perform my study based on a sample group of forty companies in the insurance industry. The study was based on four main variables namely; earnings per share from operations, income before extraordinary items, auditing fees, and non-auditing fees. The variables compare the years 2000 and 2001 to see how effective management was at meeting their predetermined benchmark earnings. If the company exceeded the prior year’s benchmark by a small percentage, this may be indicative of abusive earnings management. A regression analysis was performed and the results of this, backed up by corresponding graphs, indicate that there is a correlation between management’s attempts to achieve their benchmark earnings and non-auditing fees.
Recommended Citation
Costello, Kevin A., "Uncontrolled Earnings Management-Financial Enhancement or Downfall?" (2005). Honors Capstone Projects - All. 699.
https://surface.syr.edu/honors_capstone/699
Creative Commons License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 3.0 License.
