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The impact of Sarbanes-Oxley act on cosmetic earnings management

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  • Aono, June Y.
  • Guan, Liming

Abstract

This study examines the mitigating effect of Sarbanes-Oxley Act on cosmetic earnings management, referred by Kinnunen and Koskela (2003) as earnings manipulative behavior to round earnings such that they result in an upward bias. This behavior reports income numbers to achieve key cognitive reference points represented by N×10k. Using Benford’s law, our analysis compares the distribution of second digits in reported annual net income for publicly listed US companies between a 2-year periods before and after the year 2002 when Sarbanes-Oxley Act went into effect. Our empirical results suggest that, in the 2-year period prior to the Act, there was evidence of cosmetic earnings management. However, such behavior in manipulating net income has noticeably decreased in the period after the Act. This finding is consistent with the notion that Sarbanes-Oxley Act has a deterring impact on corporate America’s manipulative behavior to report earnings that achieve certain key reference points.

Suggested Citation

  • Aono, June Y. & Guan, Liming, 2008. "The impact of Sarbanes-Oxley act on cosmetic earnings management," Research in Accounting Regulation, Elsevier, vol. 20(C), pages 205-215.
    • Handle: RePEc:eee:reacre:v:20:y:2008:i:c:p:205-215
    DOI: 10.1016/S1052-0457(07)00212-3
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    References listed on IDEAS

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    Cited by:

    1. Lacina, Michael & Lee, B. Brian & Kim, Dong Wuk, 2018. "Benford’s Law and the effects of the Korean financial reforms on cosmetic earnings management," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 30(C), pages 2-17.
    2. Chen, Haiwei & Jory, Surendranath & Ngo, Thanh, 2020. "Earnings management under different ownership and corporate governance structure: A natural experiment with master limited partnerships," The Quarterly Review of Economics and Finance, Elsevier, vol. 76(C), pages 139-156.
    3. Lin, Fengyi & Lin, Li-Jung & Yeh, Chin-Chen & Wang, Teng-Shih, 2018. "Does the board of directors as Fat Cats exert more earnings management? Evidence from Benford’s law," The Quarterly Review of Economics and Finance, Elsevier, vol. 68(C), pages 158-170.
    4. Charles E. Jordan & Stanley J. Clark & Marilyn A. Waldron, 2014. "Cosmetic Earnings Management before and after Corporate Governance Legislation in Canada," Accounting and Finance Research, Sciedu Press, vol. 3(4), pages 105-105, August.

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