Microsoft Word 2007 ichrie conference Proceedings Final-Final 06-06-07. doc

 
2007 Annual International CHRIE Conference & Exposition 
476
As major participants in a firm’s EM, the role of managers in the overstatement of earnings is explored 
extensively by Beneish (1999b). He finds that a major motivation for managers to overstate earnings is to cash out 
their equity positions at higher prices. Also of interest are the implications to managers after discovery of 
manipulation. Beneish (1999b) finds that there are no significant differences in employment losses for managers 
who work in firms that have been found to manipulate earnings and those firms that do not. Additionally, he finds 
that the SEC is fairly lenient when imposing trading sanctions on managers who overstate earnings unless it is in the 
context of the sale of securities to the public. He does find, however, that if the SEC does pursue a firm because of 
an accounting violation, the firm suffers a severe penalty in the form of a decreased stock price. 
No matter what specific motivations firms have, it is discovered that firms take the following strategies to 
window dress their earnings to the targeted figure; namely big bath, bump up, cookie jar, and earnings smoothing.
Big bath refers to those firms that tend to make the earnings even worse when they are far below the target for the 
hope of maximizing the expected future return. The bump up theory says that firms will adjust the income to meet 
or just cross over the target when they are within the reach of the target so they meet the certain expectations. The 
cookie jar theory involves firms reducing earnings when they are way above the target. By reducing current 
earnings, firms can retain the saved earnings in the future when they do not meet the target. Earnings smoothing 
frequently happens when firms are in the normal business cycle with ordinary returns. Firms would like to smooth 
the earnings which may reduce the perception of the earnings volatility and increase the stock value. Figure 1 
illustrates the strategies.