Update: How goes SEC's war against earnings management?
✍ Scribed by Ketz, J. Edward
- Publisher
- John Wiley and Sons
- Year
- 1999
- Tongue
- English
- Weight
- 88 KB
- Volume
- 10
- Category
- Article
- ISSN
- 1044-8136
No coin nor oath required. For personal study only.
✦ Synopsis
financial reporting does not occur within a vacuum, that it is affected by social values, that investors need to expend time and energy assessing the veracity of accounting assertions, and that certain dysfunctional consequences will result from these changes unless the problems are remedied.
In his well-publicized speech on September 28,1998, the chairman of the Securities and Exchange Commission (SEC), Arthur Levitt, voiced his concerns about corporate accounting. He utilized the term "earnings management" to refer to corporate efforts to spin the economic history of the firm and present management results in the best possible light. He states that "we are witnessing an erosion in the quality of earnings, and therefore, the quality of financial reporting." He does not castigate earnings management per se; rather, Levitt worries that "Managing may be giving way to manipulation; integrity may be losing out to illusion."
The purpose of this article is to examine the fallout from Levitt's speech. We will first look at the problems he has identified and then examine the SEC initiatives he has put into motion.
I find his criticism correct, though not comprehensive; I find his recommendations interesting and necessary, albeit incremental. Levitt understands this fact, for he concludes his speech by claiming that "we need to embrace nothing less than a cultural change" in how we conduct corporate accounting.
Exhibit 1 gives the Internet address where the reader can obtain access to the chairman's speech. It also lists other speeches by SEC officials and staff that Exhibit 1.