Question

Discuss examples of accounting malpractice that corporations have used in the past to bolster reported earnings per share

Answer 1

Earnings with significant components of nonrecurring events such as positive litigation settlements, non-permanent tax reductions, or gains on sales of non-operating assets are considered to be of lower quality than earnings derived mainly from the company’s core business operations.

Examples that company used to boost net income or earning per share are

1. Recognizing revenue early

For example:

• Bill-and-hold sales
• Recording sales of equipment or software prior to installation and acceptance by customer

1. Classification of non-operating income or gains as part of operations
2. Recognizing too much or too little reserves in the current year such as bad-debt reserves, valuation allowances against deferred tax assets
3. Deferral of expenses by capitalizing expenditures as an asset such as product development costs, customer acquisition costs
4. Use of aggressive estimates and assumptions like long depreciable lives, high assumed discount rate for pension liabilities, low assumed rate of compensation growth for pension liabilities, high expected return on assets for pension
5. Use of off-balance sheet financing that is financing that does not appear on the balance sheet, such as leasing assets or securitizing receivables
6. Characterization of an increase in a bank overdraft as operating cash flow