Evidence of Earnings Management and Managers' Choice of Actuarial Assumptions for Accounting of Retiree Health Care Costs

Susan Machuga ； Karen Teitel ； Ann Costello

《Advances in Quantitative Analysis of Finance and Accounting》 11期 (2013/12) Pp. 87-111

https://doi.org/10.6293/AQAFA.2013.11.04

並列摘要

This study investigates whether or not managers select assumptions used to account for postretirement benefits enabling them to manage annual earnings, thereby increasing the likelihood of achieving earnings benchmarks. We believe the assumptions used to account for postretirement benefit costs can be used as an earnings management tool because: (i) the accounting rules allow managers great flexibility in setting the assumptions; (ii) the complexity of the accounting rules and related disclosures make it difficult for outside users to identify changes in assumptions and their economic effects; and (iii) the liability is long-term in nature enabling small changes in assumptions to have a large impact on financial statements. Our sample consists of 116 firms with six years of hand-collected data from postretirement benefit plan disclosures included in annual reports from 2002 to 2007. We find firms reporting health care inflation rates below the sample median in year t - 1 have an increased likelihood of achieving earnings benchmarks in year t consistent with managers using long term accruals such as postretirement benefits to manage earnings in subsequent years. We also find firms with the highest positive abnormal accruals in year t - 1 have selected health care inflation rates that are significantly below the sample median for year t - 1. These results are consistent with management anticipating the reversal of current accruals in the future and planning for the use of long-term accruals, increasing their flexibility of achieving earnings benchmarks. Our results imply that the quality of investor reporting could be improved by revising current postretirement accounting rules by taking away the flexibility allowed management in selecting health care inflation rates.

並列關鍵字

Earnings Management ； Post-Retirement Benefits ； Analysts' Forecast Errors ； Health Care Inflation Rates ； Multi-Year Earnings Management Time Horizon

參考文獻

(Chollet, Deborah J. (September 15, 1888). Statement before U.S. House of Representatives' Committee on Ways and Means Subcommittee on Oversight, Hearings on Employer Sponsored Retiree Health Insurance, pp. 2.).

Costello, A. (1996). Empirical data and analysis of the companies' reduction of retiree health care plans. Working paper, University of Hartford, West Hartford, CT.

(Costello, A. (1999). Retiree health under FAS 106: An employee benefit perspective. Working paper, American Risk and Insurance Association, Vancouver, BC.).

Financial Accounting Standards Board. (FASB) (1990). Employers' Accounting for Post-Retirement Benefits other than Pensions. Norwalk, CT: Financial Accounting Standard Board. Retrieved November 1, 2013, from http://www.amac.org.mx/pags/pdf/fas106.pdf

Moore, E. (2008). Do managers use their discretion afforded them under pension accounting to meet earnings targets? Working Paper, Westfield State College, Westfield, MA.