Camouflaged Earnings Management
Coauthor(s): Itay Kama.
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In recent years, there has been increased scrutiny of financial reporting and greater
analysts and investors attention to indicators of potential earnings management, in
particular, to cash and accruals relative to earnings and revenues. We assert that, in
response, firms have increased their focus on cash management aimed at aligning these
variables, which has resulted in camouflaged earnings management. Analytically, we
develop indicators of camouflaged earnings management and use them empirically to test
whether the alignment of cash and earnings has intensified following the legislation of the
Sarbanes-Oxley Act. The empirical results are all in line with, and reinforce, our assertion.
This suggests that any comprehensive investigation of earnings management should also
consider the option of camouflaging.
Source: Working Paper
Kama, Itay, and Nahum Melumad. "Camouflaged Earnings Management." Working Paper, Columbia Business School, December 2010.