Manipulating Sales Revenue to User Reference Points in Pre- and Post-sarbanes Oxley Eras

INTRODUCTION Earnings management represents the most frequently researched topic within financial accounting in the last two decades. The use of earnings management and its almost cavalier acceptance by financial statement preparers and users during the 1990’s led to the significant corporate reporting debacles of the early 2000’s (e.g., Enron, WorldCom, HealthSouth, etc.) and ultimately to the Sarbanes-Oxley Act (SarbOx) in 2002. Although no universal definition exists of earnings management, in general it embodies the deliberate manipulation of income for personal gain. For example, managers manipulate income to meet analysts’ forecasts (Payne and Robb, 2000), to increase their own wealth through bonus schemes tied to earnings (Guidry et al., 1999), or to improve share-price performance that enhances their wealth through stock-based compensation plans (Brown and Higgins, 2001). Earnings management, which is also commonly referred to as earnings manipulation, generally occurs in one of two forms. The first is known as real earnings management and results from operating manipulations. For example, to boost earnings in the current period management may shift scheduled maintenance procedures into the next period. The second is referred to as discretionary earnings management and results from accounting manipulations accomplished through the use of judgmental accruals and estimates inherent in the financial reporting process. As an example, one of the many tactics employed by HealthSouth management in the early