Accounting 'Hocus-Pocus': Earnings Management

• Author: Miriam Weismann
• Pages: 103-112

103

C 8

ACCOUNTING

“HOCUS-POCUS”

EARNINGS MANAGEMENT

Somebody saw it coming and said so. It’s not clear who, if a nyone, was listening. In

199, Arthur Le vitt, then chai rman of the Secur ities and Exchange Commi ssion

(SEC), delivered his famous “Numbers Game” speech at New York University.

Levitt express ed concern over a new “game of accounting hocus-pocus” among

market participa nts: earnings management. Th is new game had brought about the

“erosion in the quality of ea rnings” reported on company bal ance sheets to induce

investor participation and i ncrease the value of corporate stock . The game being

played was an intensive effort to meet Wall Street earnings expectations through

accounting manipulat ion and “illusions” reported as balance sheet t ransactions.

The problem was not simply caused by corporate mana gement. Levitt desc ribed

it as a “fina ncial community” problem where corporate managers, auditors, a nd ana-

lysts became par ticipants in a game of accounti ng and finance “nods and w inks.”

The calculus for wi nning is where “trickery i s employed to obscure actual fina ncial

volatility. This, in t urn, masks the true consequences of management’s decisions.”

The new game also requ ired a network of knowing par ticipants, operating

openly and notoriously with t he consent of each other, to make the game succeed.

. Arthur Le vitt, Chair man, Sec. & Excha nge Comm’n, The Numbers Game, Rema rks at NYU Center

for Law and Business (Sep t. , ), http://www.sec.gov/news/spe ech/speecharchive/ /spch.txt.

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