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Financial reporting after the Sarbanes-Oxley Act: Conservative or less earnings management?

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  • Zhou, Jian

Abstract

One of the goals of the Sarbanes-Oxley Act (hereafter SOX) was to restore confidence in financial reporting by providing incentive for firms to report financial results that reflect the underlying economic performance. Early findings are inconclusive on the success of the Act. Cohen, Dey, and Lys (2005) show that firms engage in less earnings management post-SOX, but Lobo and Zhou (2006) find that firms report earnings more conservatively. Reporting more conservatively could be consistent with greater earnings management. We simultaneously examine conservatism using discretionary accruals and earnings management using the absolute value of discretionary accruals. Our findings suggest that firms are reporting more conservatively (i.e., reporting lower discretionary accruals), but also engaging in less overall earnings management (i.e., reporting lower absolute value of discretionary accruals). Our paper contributes to the literature by investigating the impact of SOX on financial reporting and reconciling potentially conflicting findings in other studies.

Suggested Citation

  • Zhou, Jian, 2008. "Financial reporting after the Sarbanes-Oxley Act: Conservative or less earnings management?," Research in Accounting Regulation, Elsevier, vol. 20(C), pages 187-192.
    • Handle: RePEc:eee:reacre:v:20:y:2008:i:c:p:187-192
    DOI: 10.1016/S1052-0457(07)00210-X
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    References listed on IDEAS

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    1. Basu, Sudipta, 1997. "The conservatism principle and the asymmetric timeliness of earnings," Journal of Accounting and Economics, Elsevier, vol. 24(1), pages 3-37, December.
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    Cited by:

    1. Yu-Luen Ma & Nat Pope, 2020. "The impact of Sarbanes–Oxley on property-casualty insurer loss reserve estimates," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 45(2), pages 313-334, April.
    2. Herda, David N. & Notbohm, Matthew A. & Dowdell, Thomas D., 2014. "The effect of external audits of internal control over financial reporting on financial reporting for clients of Big 4, Second-tier, and small audit firms," Research in Accounting Regulation, Elsevier, vol. 26(1), pages 98-103.
    3. Oler, Mitchell, 2014. "Accounting standard’s effectiveness on equity overstatement – Conservatism when it matters," Research in Accounting Regulation, Elsevier, vol. 26(1), pages 75-82.
    4. Dowdell, Thomas D. & Herda, David N. & Notbohm, Matthew A., 2014. "Do management reports on internal control over financial reporting improve financial reporting?," Research in Accounting Regulation, Elsevier, vol. 26(1), pages 104-109.
    5. Stergios Leventis & Panagiotis Dimitropoulos, 2012. "The role of corporate governance in earnings management: experience from US banks," Journal of Applied Accounting Research, Emerald Group Publishing Limited, vol. 13(2), pages 161-177, September.

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