Earnings Management To Report an Additional Cent of EPS: Evidence From Pre- and Post-SOX Periods

Document Type

Article

Publication Date

1-1-2015

School

Accountancy

Abstract

Prior research suggests certain types of earnings management (e.g., discretionary earnings management) declined noticeably after implementation of the Sarbanes-Oxley Act (SOX) while other forms (e.g., real earnings management) increased in the post-SOX era. The current research examines a form of biased reporting documented in the literature whereby management manipulates income so that EPS can be rounded up to present an additional cent of EPS. In particular, prior researchers foudnt hat when they re-calculated firms' EPS amoutns, the third digit to the the right of the decimal point fell in the numerical range five through nine inordinately more often than would be expected. Thus, the rounding of these calculated EPS figures by maangement to report them in the financial statements in only two places to the right of the decimal point resulted in EPS being increased by an additional cent much more frequently than should have occurred by chance. We replicate the previous research in this area but do so for distinct pre- and post-SOX periods. The findings reveal clear evidence of this manipulative behavior prior to SOX's implementation but no signs of it afterward, thus suggesting SOX played a key role in the demise of this form of biased financial reporting.

Publication Title

Academy of Accounting and Financial Studies Journal

Volume

19

Issue

3

First Page

153

Last Page

163

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