Reaching Into the Cookie Jar? Why Conservative Accounting Is Sometimes a Problem
Document Type
Article
Publication Date
6-13-2015
Abstract
In this article, we discuss four financial statement accounts in which overly conservative accounting has been used to create reserves for future income-increasing earnings management. Due to the multiyear nature of this activity and the role of managers' discretion in many accounting choices, it can be very difficult for auditors to uncover such behavior. We report and interpret academic research demonstrating that this activity is somewhat common, and provide practical suggestions that auditors can use to identify it. Our article reinforces the notion that auditors need to be equally skeptical of overly conservative accounting choices as they are of aggressive accounting choices. © 2015 Wiley Periodicals, Inc.
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