Method shifting in accruals management: An examination of response of software firms to SOP 97-2.

摘要

The American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 97-2 to limit the considerable discretion in revenue recognition practiced by software firms. The more stringent rules of SOP 97-2 may reduce earnings management by constraining the degree to which managers can manage revenues. However, to the degree that managers have other methods available to manage earnings, SOP 97-2 might not reduce earnings management to the same degree as it reduces revenue management, because managers could shift earnings management from revenue management to expense management. The purpose of this study is to assess whether SOP 97-2 significantly reduces revenue management and earnings management of software firms, and whether the method shifting mitigates the effect of SOP 97-2 on earnings management.; The degree to which software firms manage revenues, expenses, and earnings was measured as the strength of managers' reactions to a selected incentive of earnings management. The selected incentive of earnings management is the demand for attracting external financing. Managed revenues, managed expenses, and managed earnings were estimated from models adapted from the Modified Jones model. Regression analyses were employed to test whether the correlations between the incentive variable and the dependent variables (managed revenues, managed expenses, and managed earnings) are different for pre-SOP 97-2 than for post-SOP 97-2. The event window of SOP 97-2 is from June 1996 to December 1997. The sample periods are the fiscal year before and after the event window. The sample includes 744 software firms and 248 non-software firms. Non-software business service firms were included as a control group to account for potential confounding events.; The study found that the correlation between the incentive variable and managed revenues decreased after SOP 97-2, which suggests that SOP 97-2 effectively reduced revenue management of software firms. The results also suggest that software firms during the sample periods managed revenues rather than bottom-line earnings. The study did not find evidence supporting the hypothesis that software firms shifted from revenue management to expense management after SOP 97-2.