【正文】 owed.Criticism of pooling accounting has been significant and the FASB has reacted by announcing the elimination of the method. However, the effective date has been delayed as the FASB has received strong opposition from industry.2. Purchase accounting and goodwillUnder the purchase method of accounting for acquisitions if the price paid by the acquiring firm exceeds the fair value of the pany acquired, the difference is recorded as an intangible asset, goodwill. Goodwill is amortized over future periods, thus, the creation of goodwill causes future expenses, therefore reducing reported earnings. If the acquirer conservatively values assets (such as private placement or illiquid securities and real estate) or liabilities (reserves, accrued liabilities), the pany may be able to recognize additional earnings in the near future as it estimates bee less conservative.Professor Brilloff has also been a critic of the accounting practices of Conseco, a financial services pany. Mr. Brilloff contended that Conseco had manipulated its earnings through its acquisition practices. In summary, he argued that Conseco had inflated the loss or claim reserves of the insurance entities it acquired and recognized a corresponding asset of goodwill at the time of acquisition. It could then reduce the reserves over the near term to inflate earnings while amortizing the goodwill over a significantly longer period of time.f. Revenue RecognitionThe timing of the recognition of revenue is the most likely area to target for management and manipulation. From an operational standpoint, firms can take aggressive actions to boost revenues and sales in one period through providing incentives to their sales force, utilize overtime to push shipments out the door. They may also take aggressive accounting actions such as selling securities classified held for sales recognize gains in ine versus stockholders equity, aggressive in the timing of the recognition of sales or aggressive in the application of broad or unclear accounting guidance.g. Immaterial misapplication of accounting principlesMateriality is a concept that has been under fire from the SEC due to its misuse. As previously discussed. Errors, misstatements and misapplication of accounting principles have been overlooked if they fell below the materiality threshold. A pany may knowingly misstate earnings by amounts that fall below the materiality threshold by not correcting known errors or other misstatements. If the practice continues for a number of periods, the balance sheet (retained earnings) may bee significantly misstated.h. Reserve onetime chargesThe use of onetime charges, established in the form of a reserve, can be used to manage earnings. The pany conservatively recognizes a onetime charge in the form of a contingency reserve for a possible future loss or future expense. They anticipate that analysts will discount the charge since it is not deemed to be part of operating ine. Over time, the pany changes its estimate (reduces) to recognize additional earnings.7. Examples of cases of earnings manipulationa. CendantCendant (AAER 1272,06/14/00) Cendant was created in a 1997 merger of equals between CUC International and HFS. In April 1998, legacy HFS officials learned that prior to the merger, CUC executives had engaged in accounting irregularities that inappropriately recorded over $500 million in phony profits. The accounting irregularities at CUC were widespread, used at least four earnings manipulation techniques and involved more than 20 employees. SEC documents assert that the accounting manipulations at CUC were driven by senior management39。s balance sheet, increasing goodwill. If the conservative valuations prove to be excessive, the pany is able to reduce its operating expenses in the near term by reducing its estimate for the liability. The additional goodwill created would be amortized over a long period of time and not have a significant impact on near term results. There are two methods of accounting for mergers and acquisitions. Pooling of interests (pooling) accounting and purchase accounting. Pooling recognizes the transaction as a merger of equals, thus the transaction is recorded as pany A plus pany B. Purchase accounting treats the transaction as a purchase. The fair value of the purchased pany is assessed and pared to the purchase price. Any excess or premium paid above the fair value of the assets is recognized as goodwill. Goodwill is amortized over a period of time not to exceed forty years.1. Pooling on interestsAbraham Brilloff, professor emeritus at Baruch College, in an article in the October 23, 2000 issue of Barron39。 Earnings management will remain an important problem facing the markets as long as there is pressure on panies and individual managers to perform. However, careful auditing procedures and continuing attentiveness by the SEC and other regulatory bodies will help reduce the occurrence of earnings management into the future.6. Types of Earnings Management and Manipulation (by Scott McGregor)a. Cookiejar ReservesThe accrual of expenses is to reflect the period in which the expense was incurred. For example, if a firm hires a consultant to perform a particular activity, it should reflect the expense related to that activity in the period in which it is incurred, not when the bill is paid or invoice received. In many cases, the accrual of expenses, or reserves in particular industries such as insurance and banking, are based on estimates. As such, the estimates have varying degrees of accuracy. During times of strong earnings, the firm establishes additional expense accruals and subsequently reduces the liability to generate earnings when needed in the future pulling a cookie from the jar.b. Capitalization practicesIntangible assets, software capitalization, research and development. In 1997, panies were allowed to capitalize the costs of internally developed soft