Title

Revenue Manipulation And Restatements By Loss Firms

Keywords

Auditing; Earnings management; Restatements; Revenue manipulation

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 an-other indicator of manipulation that may be used by auditors and regulators in identifying firms that are more likely to overstate revenues.

Publication Date

11-1-2008

Publication Title

Auditing

Volume

27

Issue

2

Number of Pages

1-29

Document Type

Article

Personal Identifier

scopus

DOI Link

https://doi.org/10.2308/aud.2008.27.2.1

Socpus ID

77249119215 (Scopus)

Source API URL

https://api.elsevier.com/content/abstract/scopus_id/77249119215

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