Forthcoming in The Review of Accounting and Finance, Volume 4, Number 1 (2005)

In 2001 Enron filed amended financial statements setting off a chain of events starting with its bankruptcy filing and including the conviction of Arthur Andersen for obstruction of justice.  The end of 2001 and the first half of 2002 included a heightened level of publicity for the accounting practices of listed companies.  This paper addresses whether there was a detectable change in the incidence of earnings management around this time period.

Earnings reports released in 2001 and 2002 were analyzed.  The results showed that revenue numbers were subject to upwards management.  Benford’s Law was used to detect such manipulations.  Earnings Per Share (EPS) numbers showed a marked discontinuity in the distribution around zero which is consistent with upwards management.  The results also showed a tendency towards neat round EPS numbers such as 0.10, 0.20, etc.  The overall results are consistent with a small but noticeable increase in earnings management in 2002.  Enron’s reported numbers are reviewed and these show a strong tendency towards making financial thresholds. 

Copyright © 2002-2004 by Mark J. Nigrini.  All rights reserved.

 I wish to thank participants at the annual meeting of the E&Y CARAT at the University of Kansas for their comments.  I also wish to thank Jeff Archambault, Mary Curtis, Charles Davis, James Livingston, and Ram Natarajan for their reviews and suggestions on the first version of this paper.  Thanks are also due to the editor, Ahmed Riahi-Belkaoui, and the two reviewers for their constructive reviews and editorial suggestions.

Forthcoming in The Review of Accounting and Finance, Volume 4, Number 1 (2005)