Revenue Manipulation and Restatements by Loss Firms

    Authors

    J. L. Callen; S. W. G. Robb;D. Segal

    Comments

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    Abbreviated Journal Title

    Audit.-J. Pract. Theory

    Keywords

    revenue manipulation; earnings management; auditing; restatements; SEASONED EQUITY OFFERINGS; EARNINGS MANAGEMENT; EMPIRICAL-ANALYSIS; INTERNET FIRMS; AUDITORS; PERFORMANCE; INFORMATION; Business, Finance

    Abstract

    This paper investigates the relation between the extent of a firm's past and expected future losses or negative cash flows and the ex ante probability that it will manipulate revenues. When a firm has a string of losses or negative cash flows, traditional valuation models do not yield reliable estimates of firm value, and traditional price-earnings ratios are not meaningful. Evidence suggests that market participants tend to value loss firms on the basis of the level and growth in revenues, rather than cash flows and earnings, thereby motivating these firms to overstate revenue. In fact, empirical results indicate that there is a positive relation between the number of years that firms exhibit and/or anticipate losses or negative cash flows and investment in receivables after controlling for credit policy. We further show that the ex ante likelihood that firms manipulate revenue in violation of GAAP is positively associated with the history of past and expected future losses or negative cash flows, as well as with the investment in accounts receivable (adjusted for credit policy). Our results suggest another indicator of manipulation that may be used by auditors and regulators in identifying firms that are more likely to overstate revenues.

    Journal Title

    Auditing-a Journal of Practice & Theory

    Volume

    27

    Issue/Number

    2

    Publication Date

    1-1-2008

    Document Type

    Article

    Language

    English

    First Page

    1

    Last Page

    29

    WOS Identifier

    WOS:000265151200001

    ISSN

    0278-0380

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