James W. Bannister

Earnings management and auditor conservatism: effects of SEC enforcement actions

Outlines previous research into the factors influencing managers’ choice of accounting procedures and auditors’ acceptance of them, including regulatory action by the US Securities and Exchange Commission (SEC). Studies data from 1980‐1996 SEC enforcement actions against big five accounting firms or their staff to investigate the levels of discretionary accruals made by the relevant clients during the period of investigation. Explains how the discretionary accruals are estimated over various time frames and shows that clients have more income decreasing accruals as the investigation takes place. Considers possible reasons for this and concludes that it is due to the auditors becoming more conservative.

Disclosure biases in proxy performance graphs: The influence of performance and compensation committee composition

Purpose – The purpose of this paper is to investigate whether proxy statement performance graph disclosures are influenced by the firms governance structure and management concerns about relative performance. Design/methodology/approach – Logistic regression is used to test whether the level of performance graph disclosure decreases with lower relative performance and higher insider director membership on the compensation committee of the board. Also, Z and t-statistics test whether bias in the selected peer group benchmark is related to insider membership on the committee. Findings – The empirical results suggest that reporting discretion was exercised for managements benefit. The amount of explicit disclosure on cumulative returns in the performance graph decreases as relative performance declines and decreases when insider directors serve on the compensation committee. Moreover, the presence of insider directors on the compensation committee is associated with a biased choice of peer group benchmark return. Research limitations/implications – The sample for the study consists of 141 large firms. Future research could examine a larger group of firms that vary in size or other disclosures. Practical implications – These findings support recent actions taken to improve corporate governance. Further public policy steps could be taken. For example, the SEC could require firms to include an explanation for appointing insiders to the compensation committee. Originality/value – The results are consistent with managers using discretion over information disclosures and suggest that compensation committees with insider members play a less active role in providing information that is helpful to shareholders.

Influence of TARP regulations on executive compensation plans and corporate governance of ‘exceptional assistance’ recipients

Our article examines proxy statement disclosures to gain insight about the role of the Special Master, the requirement of a risk analysis of compensation plans and the requirement of a provision for compensation clawbacks for firms receiving ‘exceptional assistance’ under the Emergency Economic Stabilization Act of 2008. We examine the only three firms – AIG, Citigroup and Bank of America – that both received exceptional assistance and provided 2010 proxy statements. We find that the Special Master, in his capacity of reviewing and approving compensation payouts and compensation structures as a government representative, mitigated the costs of TARP restrictions by using his discretion to override some restrictions, such as allowing cash compensation in excess of the

Do financial analysts decompose past earnings when making future earnings forecasts

500 000 maximum. We also observe significantly more compensation-related risk disclosures and a greater focus on risk in the design of compensation plans and choice of performance metrics after firms were required to analyze whether compensation plans motivate excessive risk-taking. All three firms appear to acknowledge concerns about their compensation plans, either explicitly by formally stating their concerns or implicitly by adopting new risk-related performance measures. In addition, we note that the amount of disclosure the three firms provide in responding to the same regulations differs significantly. Finally, we find that some firms adopted clawbacks beyond what is required, suggesting that firms find clawbacks beneficial in curbing excessive risk-taking. Our analysis of disclosures suggests that it would be useful for the SEC to review the resulting TARP disclosures as it determines whether such rules would be beneficial to impose on all firms.

Analysis of Corporate Disclosures on Relative Performance Evaluation

Explains why financial analysts could find it useful to separate past earnings into discretionary accruals and earnings before discretionary accruals; referring to related research to develop hypotheses on the effects of both on the change in analysts’ earnings forecasts for the subsequent year. Tests these on a sample of 142 US manufacturing firms and presents the results which suggest that analysts do not decompose past earnings. Discusses three possible interpretations of the results and supports Sloan’s (1996) finding that the capital market does not seem to price accruals rationally.