企业盈利质量分析中英文对照外文翻译文献

企业盈利质量分析中英文对照外文翻译文献

企业盈利质量分析中英文对照外文翻译文献

(文档含英文原文和中文翻译)

原文：

Measuring the quality of earnings

1. Introduction

Generally accepted accounting principles (GAAP) offer some flexibility in preparing the financial statements and give the financial managers some freedom to select among accounting policies and alternatives. Earning management uses the flexibility in financial reporting to alter the financial results of the firm (Ortega and Grant, 2003).

In other words, earnings management is manipulating the earning to achieve a

企业盈利质量分析中英文对照外文翻译文献

predetermined target set by the management. It is a purposeful intervention in the external reporting process with the intent of obtaining some private gain (Schipper, 1989).

Levit (1998) defines earning management as a gray area where the accounting is being perverted; where managers are cutting corners; and, where earnings reports reflect the desires of management rather than the underlying financial performance of the company.

The popular press lists several instances of companies engaging in earnings management. Sensormatic Electronics, which stamped shipping dates and times on sold merchandise, stopped its clocks on the last day of a quarter until customer shipments reached its sales goal. Certain business units of Cendant Corporation inflated revenues nearly $500 million just prior to a merger; subsequently, Cendant restated revenues and agreed with the SEC to change revenue recognition practices. AOL restated earnings for $385 million in improperly deferred marketing expenses. In 1994, the Wall Street Journal detailed the many ways in which General Electric smoothed earnings, including the careful timing of capital gains and the use of restructuring charges and reserves, in response to the article, General Electric reportedly received calls from other corporations questioning why such common practices were “front-page” news.

Earning management occurs when managers use judgment in financial reporting and in structuring transactions to alter financial reports to either mislead some stakeholders about the underlying economic performance of the company or to influence contractual outcomes that depend on reported accounting numbers (Healy and Whalen, 1999).

Magrath and Weld (2002) indicate that abusive earnings management and fraudulent practices begins by engaging in earnings management schemes designed primarily to “smooth” earnings to meet internally or externally imposed earnings forecasts and analysts’ expectations.

Even if earnings management does not explicitly violate accounting rules, it is an ethically questionable practice. An organization that manages its earnings sends a

企业盈利质量分析中英文对照外文翻译文献

message to its employees that bending the truth is an acceptable practice. Executives who partake of this practice risk creating an ethical climate in which other questionable activities may occur. A manager who asks the sales staff to help sales one day forfeits the moral authority to criticize questionable sales tactics another day.

Earnings management can also become a very slippery slope, which relatively minor accounting gimmicks becoming more and more aggressive until they create material misstatements in the financial statements (Clikeman, 2003)

The Securities and Exchange Commission (SEC) issued three staff accounting bulletins (SAB) to provide guidance on some accounting issues in order to prevent the inappropriate earnings management activities by public companies: SAB No. 99 “Materiality”, SAB No. 100 “Restructuring and Impairment Charges” and SAB No. 101 “Revenue Recognition”.

Earnings management behavior may affect the quality of accounting earnings, which is defined by Schipper and Vincent (2003) as the extent to which the reported earnings faithfully represent Hichsian economic income, which is the amount that can be consumed (i.e. paid out as dividends) during a period, while leaving the firm equally well off at the beginning and the end of the period.

Assessment of earning quality requires sometimes the separations of earnings into cash from operation and accruals, the more the earnings is closed to cash from operation, the higher earnings quality. As Penman (2001) states that the purpose of accounting quality analysis is to distinguish between the “hard” numbers resulting from cash flows and the “soft” numbers resulting from accrual accounting.

The quality of earnings can be assessed by focusing on the earning persistence; high quality earnings are more persistent and useful in the process of decision making.

Beneish and Vargus (2002) investigate whether insider trading is informative about earnings quality using earning persistence as a measure for the quality of earnings, they find that income-increasing accruals are significantly more persistent for firms with abnormal insider buying and significantly less persistent for firms with abnormal insider selling, relative to firms which there is no abnormal insider trading.

Balsam et al. (2003) uses the level of discretionary accruals as a direct measure

企业盈利质量分析中英文对照外文翻译文献

for earning quality. The discretionary accruals model is based on a regression relationship between the change in total accruals as dependent variable and change in sales and change in the level of property, plant and equipment, change in cash flow from operations and change in firm size (total assets) as independent variables. If the regression coefficients in this model are significant that means that there is earning management in that firm and the earnings quality is low.

This research presents an empirical study on using three different approaches of measuring the quality of earnings on different industry. The notion is; if there is a complete consistency among the three measures, a general assessment for the quality of earnings (high or low) can be reached and, if not, the quality of earnings is questionable and needs different other approaches for measurement and more investigations and analysis.

The rest of the paper is divided into following sections: Earnings management incentives, Earnings management techniques, Model development, Sample and statistical results, and Conclusion.

2. Earnings management incentives 2.1 Meeting analysts’ expectations

In general, analysts’ expectations and company predictions tend to address two high-profile components of financial performance: revenue and earnings from operations.

The pressure to meet revenue expectations is particularly intense and may be the primary catalyst in leading managers to engage in earning management practices that result in questionable or fraudulent revenue recognition practices. Magrath and Weld (2002) indicate that improper revenue recognition practices were the cause of one-third of all voluntary or forced restatements of income filed with the SEC from 1977 to 2000.

Ironically, it is often the companies themselves that create this pressure to meet the market’s earnings expectations. It is common practice for companies to provide earnings estimates to analysts and investors. Management is often faced with the task of ensuring their targeted estimates are met.

企业盈利质量分析中英文对照外文翻译文献

Several companies, including Coca-Cola Co., Intel Corp., and Gillette Co., have taken a contrary stance and no longer provide quarterly and annual earnings estimates to analysts. In doing so, these companies claim they have shifted their focus from meeting short-term earnings estimates to achieving their long-term strategies (Mckay and Brown, 2002).

2.2 To avoid debt-covenant violations and minimize political costs

Some firms have the incentive to avoid violating earnings-based debt covenants. If violated, the lender may be able to raise the interest rate on the debt or demand immediate repayment. Consequently, some firms may use earnings-management techniques to increase earnings to avoid such covenant violations. On the other hand, some other firms have the incentive to lower earnings in order to minimize political costs associated with being seen as too profitable. For example, if gasoline prices have been increasing significantly and oil companies are achieving record profit level, then there may be incentive for the government to intervene and enact an excess-profit tax or attempt to introduce price controls.

2.3 To smooth earnings toward a long-term sustainable trend

For many years it has been believed that a firm should attempt to reduce the volatility in its earnings stream in order to maximize share price. Because a highly violate earning pattern indicates risk, therefore the stock will lose value compared to others with more stable earnings patterns. Consequently, firms have incentives to manage earnings to help achieve a smooth and growing earnings stream (Ortega and Grant, 2003).

2.4 Meeting the bonus plan requirements

Healy (1985) provides the evidence that earnings are managed in the direction that is consistent with maximizing executives’ earnings-based bonus. When earnings will be below the minimum level required to earn a bonus, then earning are managed upward so that the minimum is achieved and a bonus is earned. Conversely, when earning will be above the maximum level at which no additional bonus is paid, then earnings are managed downward. The extra earnings that will not generate extra bonus this current period are saved to be used to earn a bonus in a future period.

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