Earnings Management through Real Activities Manipulation

Evitar Divulgar Perdas: Um Estudo Empírico do Gerenciamento de Resultados por Meio de Decisões Operacionais

“…Roychowdhury (2006) documents that the manipulation of accounting accruals does not directly affect a company's cash flow, and is simply a result of the accrual basis of accounting, in which accounting transactions are posted within the period in which they are carried out. Thus, revenue is recognized in accordance with achievement and set against those expenses associated with such achievement (Martinez, 2001).…”

“…Roychowdhury (2006) defines the manipulation of real activities as management activites that deviate from what are considered normal business practices, with the aim of meeting certain earnings constraints. In other words, the manipulation of real activities is considered a departure from operating practices, and is motivated by managers' desire to deceive certain stakeholders, who believe that particular targets in financial reports have been achieved during a company's normal operating activities (Roychowdhury, 2006).…”

“…Decisions that affect cash flow are documented in national and international literature and include: (i) increases in sales revenue due to an accelaration in the sales process and/or unsustainable sales generation via an increase in (temporary) discounts in prices or an easing of restrictions to credit for clients; (ii) the timing of delivery of goods to clients; (iii) a reduction in the cost of goods sold via an increase in production levels (economies of scale), thus improving the financial results for the period; (iv) a reduction in research and development, staff training, factory maintenance, and sales, marketing and administrative expenses; and (v) the timing of making investments (Fields, Lyz, & Vincent, 2001;Martinez, 2001;Goncharov, 2005;Roychowdhury, 2006;Paulo, 2007;Martinez & Cardoso, 2009;Gunny, 2010;Zang, 2012). Roychowdhury (2006) developed tests in order to investigate whether there is evidence of abnormal real activities among companies that post small annual profits.…”

“…Roychowdhury (2006) developed tests in order to investigate whether there is evidence of abnormal real activities among companies that post small annual profits. Using information covering the years 1987 to 2001 for all of the companies in the COMPUSTAT database, where there was sufficient data to calculate the necessary variables, but excluding financial companies and regulated industries with accounting characteristics that differed from the rest, and employing the statistical models developed by Dechow, Kothari, and Watts (1998), it was shown that those companies that disclosed a positive profit margin close to zero, reported, on average, abnormally low operating cash flow, 2% lower, in terms of total assets, than that of the other companies in the sample.…”

“…These are not objective but instead depend on managers' judgements and estimations, such as when making bad debt provisions and contingencies (Goulart, 2007), known in academic management literature as accruals. Research has increasingly come to focus, however, on other forms of earnings management, known as operational, in which decisions taken by management have been considered more damaging to companies and market participants because they affect cash flow and not only profit (Roychowdhury, 2006). Moreover, earnings management via accruals is easier for the market, auditors and regulators to detect, compared with earnings management via operating decisions, which could thus encourage companies to use this strategy (Graham, Harvey, & Rajgopal, 2005;Cohen & Zarowin, 2010).…”