|  | | 2007 News and Press Releases | | |
HEADLINE NEWS:
What's Your Fraud Score?, Receive the wrong grade on this test, and your auditor may be scouring your company's financial statements for evidence of earnings management.
Marie Leone
cfo.com. August 17, 2007
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EXCERPT: A new research report contains formulas to help auditors and investors predict the likelihood that a public company is playing earnings management games. Sponsored by the Big Four accounting firms, the report, "Predicting Material Accounting Manipulations," explains how to calculate a "fraud score" for public companies, thereby identifying which corporate books deserve further scrutiny. A fraud score that exceeds 1.00 is a "red flag" indicating that a company may be toying with how it accounts for cash and accruals so that it can ultimately boost stock prices, says study co-author Weili Ge, an accounting professor at the University of Washington. The mathematical model, presented in the paper released in late June, hunts for abnormal patterns in five key areas where manipulation likely takes place: accrual quality (in terms of the number of accruals being booked); financial performance (including earnings growth, cash margins, and transaction management), non-financial performance (order backlog and employee headcount), off-balance sheet activities (operating leases and pension assumptions), and market-based measures (valuations and price-to-earnings ratio). … The researchers developed the model by examining 2,191 Accounting and Auditing Enforcement Releases issued by the Securities and Exchange Commission between 1982 and 2005. The releases are public documents that identify corporate accounting and auditing misconduct allegedly committed by executives and auditors. From that batch of releases, the study authors identified 680 companies with alleged manipulations in at least one of their quarterly or annual financial statements. |
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