David Bourget (Western Ontario)
David Chalmers (ANU, NYU)
Rafael De Clercq
Jack Alan Reynolds
Learn more about PhilPapers
Journal of Business Ethics 69 (4):355 - 372 (2006)
The Sarbanes–Oxley (SOX) Act was passed in 2002 in response to various instances of corporate malfeasance. The Act, designed to protect investors, led to wide-ranging regulation over various actions of managers, auditors and investment analysts. Part of SOX, and the focus of this study, targeted the disclosure by firms of “pro forma” earnings, an alternate (from GAAP earnings), flexible and unaudited measure of firm performance. Specifically, SOX directed the Securities and Exchange Commission (SEC) to craft regulation which would reduce – and preferably eliminate – any pro forma earnings disclosure which might be “misleading”. Examining earnings press releases over a 3-year period, this study addresses three questions. Were firms disclosing pro forma in a potentially misleading manner, what was the nature of this potentially misleading disclosure, and did SOX affect the disclosure practices? We find the following. In 2001 (prior to SOX), 53 firms – over 10% of all U.S. S&P 500 firms – were disclosing pro forma earnings in a potentially misleading manner. This was being done most commonly by using traditional GAAP terminology (e.g., “net income”) in the press release headline to describe what was later in the press release revealed to be a pro forma amount (i.e., “net income excluding special items”). By 2003 (subsequent to the SEC regulation), potentially misleading disclosure practices were seen in less than 1% of the earnings press releases of S&P 500 firms. This significant reduction suggests that managers, prior to the regulation, were either careless in their pro forma reporting practice, or were intentionally – and unethically – attempting to mislead investors. Either way, we conclude that the SEC regulation was both necessary and effective.
|Keywords||pro forma earnings disclosure management misleading regulation|
|Categories||categorize this paper)|
Setup an account with your affiliations in order to access resources via your University's proxy server
Configure custom proxy (use this if your affiliation does not provide a proxy)
|Through your library|
References found in this work BETA
No references found.
Citations of this work BETA
David Hillier, Allan Hodgson, Peta Stevenson-Clarke & Suntharee Lhaopadchan (2008). Accounting Window Dressing and Template Regulation: A Case Study of the Australian Credit Union Industry. [REVIEW] Journal of Business Ethics 83 (3):579 - 593.
Similar books and articles
Gopal V. Krishnan & Linda M. Parsons (2008). Getting to the Bottom Line: An Exploration of Gender and Earnings Quality. [REVIEW] Journal of Business Ethics 78 (1-2):65 - 76.
Stephen Yan-Leung Cheung, J. Thomas Connelly & Piman Limpaphayom (2007). Determinants of Corporate Disclosure and Transparency. International Corporate Responsibility Series 3:313-342.
Alex G. H. Chu, Xingqiang du & Guohua Jiang (2011). Buy, Lie, or Die: An Investigation of Chinese ST Firms' Voluntary Interim Audit Motive and Auditor Independence. [REVIEW] Journal of Business Ethics 102 (1):135-153.
Lori Holder-Webb & Jaffrey R. Cohen (2007). The Association Between Disclosure, Distress, and Failure. Journal of Business Ethics 75 (3):301 - 314.
J.-L. W. Mitchell Der Zahvann & Greg Tower (2004). Audit Committee Features and Earnings Management: Further Evidence From Singapore. International Journal of Business Governance and Ethics 1 (s 2-3):233-258.
Anna M. Cianci & S. Kaplan (2008). The Effects of Management's Preannouncement Strategies on Investors' Judgments of the Trustworthiness of Management. Journal of Business Ethics 79 (4):423 - 444.
Allan S. Ashley & Simon S. M. Yang (2004). Executive Compensation and Earnings Persistence. Journal of Business Ethics 50 (4):369-382.
Jacques Barnea (2007). From Event-Driven to Period-Driven Voluntary Earnings Disclosure? A Value-Adding Disclosure Strategy. International Journal of Business Governance and Ethics 3 (3):274-307.
Jeffrey S. Miller (2009). Opportunistic Disclosures of Earnings Forecasts and Non-GAAP Earnings Measures. Journal of Business Ethics 89 (1):3 - 10.
Hoje Jo & Yongtae Kim (2008). Ethics and Disclosure: A Study of the Financial Performance of Firms in the Seasoned Equity Offerings Market. [REVIEW] Journal of Business Ethics 80 (4):855 - 878.
Added to index2009-01-28
Total downloads9 ( #156,823 of 1,100,746 )
Recent downloads (6 months)1 ( #289,565 of 1,100,746 )
How can I increase my downloads?