【正文】 expectations. The Chairman and CFO had to pay penalties of $50,000 and $40,000, respectively. Most likely, there were quite a few individual investors who incurred greater financial losses as a result of their actions.f. 3Com3Com agreed in November 2000 to pay $259 million to settle shareholder lawsuits involving accounting irregularities following its 1997 acquisition of . Robotics Corp. 3Com had allegedly concealed losses at . Robotics when they bined the panies. Under pressure from the SEC, 3Com was forced to reduce it stated net ine for 1997 by $111 million and reduce a purchaserelated charge for 1998 by $158 million.g. . GraceWR Grace amp。s accounting practices by the SEC and several Congressional Committees may lead to the same types of sanctions against individuals as those imposed on Cendant executives. Recent reports suggest that several highlevel executives at Enron engaged in deliberate attempts to conceal the magnitude of Enron39。s books. For these types of transactions, CUC management typically selected smaller divisions that they knew would not be fully audited. When operating shortfalls at a new CUC division depleted its reserves, CUC was desperate for a major business bination and began discussions with HFS. In May 1997, the merger discussions resulted in the Cendant agreement and the possibility of reserves large enough to continue the earnings manipulation schemes. In addition to using the Cendant merger reserves to continue its revenue manipulation schemes, CUC management also directed that millions of dollars of CUC assets, both impaired and unimpaired, be written off against the Cendant reserve. The write off of impaired assets was necessary to cover CUC39。s accounting for liabilities related to its business binations went far beyond what GAAP permitted. CUC managers arbitrarily determined the amounts that CUC would reserve for liabilities, at times simply doubling the amounts calculated as CUC39。. According to the SEC documents, CUC management maintained an annual schedule setting forth opportunities that were available to inflate operating ine, creating a cheat sheet listing the opportunities that would be used in the ing year and the amounts that would be needed from each opportunity. At the end of each fiscal quarter, financial reporting personnel at CUC headquarters prepared preliminary consolidated quarterly financial results. CUC management then directed topside adjustments consisting of simply adding or deducting specific lumpsum amounts to or from reported revenues and expenses until reported results met or exceeded published earnings expectations. Once ine was adjusted, CUC senior management would make additional alterations among specific line items to ensure that reported expense categories were set at approximately the same percentage of revenues as in previous quarters. According to the SEC, the changes directed by management were a deliberate, topdown process of `reverse engineering,39。s entitled Pooling and Fooling brought attention to the use of pooling accounting by Cisco Systems to inflate its operating earnings. Cisco has been an active acquirer paying $16 billion for twelve panies in fiscal 2000 alone, but through the use of pooling accounting, Cisco only recognized only $133 million in cost in its capital accounts for these transactions. In addition, five of the acquisitions were deemed too immaterial to restate prior period financial statements. Brilloff contends that Cisco39。 Finally, July of 2001 saw the issuance of SAB 102 concerning Loan Loss Allowances, another preferred tool of earnings management. These bulletins will not pletely prevent earnings management, and therefore they will not be the last of their kind. Since a favorite practice of corrupt management is to justify earnings management by claiming it is immaterial, this statement is particularly helpful to current and future auditors. Recent publicity of high profile earnings management from some of the nation’s most elite panies, bined with a sagging economy have heightened investor’s fears about the occurrence of earnings management. This uncertainty ultimately has the potential to undermine the efficient flow of capital thereby damaging the markets as a whole.4. Incentives to Manage EarningA. EXTERNAL FORCES ? Analyst Forecasts Companies are under extreme pressure to meet analysts’ earnings estimates in order to prevent large drops in their stock price. ? Debt markets and contractual obligations Companies depend on achieving certain earnings figures to obtain access to debt markets, or even to meet their current debt covenants and other contractual obligations. ? Competition There is pressure in highly petitive industries to stay at the top of the industry in terms of revenue or market share. However, it is interesting to note that the investing public does not necessarily view minor earnings management as unethical, but in fact as a mon and necessary practice in the everyday business world. Therefore, investors and the public view minor earnings management as acceptable and an everyday business practice. Arthur Levitt, the old SEC Chairman, defined earnings management as “practices by which earnings reports reflect the desires of management rather than the underlying financial performance of the pany.”19 / 19Earnings Management and Earnings Quality1. What is Earnings Management? (Bryan Hall’s Webpage)Earnings management is defined by accounting literature asEarnings management is often defined as the planned timing of revenues, expenses, gains and losses to smooth out bumps in earnings. In most cases, earnings management is used to increase ine in the current year at the expense of ine in future years. For example, panies prematurely recognize sales before they are plete in order to boost earnings. Earnings management can also be used to decrease current earnings in order to increase ine in the future. The classic cas