7 - General Electric and the Problem of Earnings Management

Summary

78% of the surveyed executives would give up economic value in exchange for smooth earnings. Graham, Harvey & Rajgopal, 2005 Over the last twenty years, as memories of the crisis that spurred the passage of the Sarbanes–Oxley Act of 2002 (Sarbanes–Oxley) faded, public company securities fraud receded as a matter of national concern. The stock market losses arising out of the financial crisis of 2008 were only partly linked to securities fraud, and the slow economic recovery afterward did not generate many spectacular investor losses that could be firmly tied to a corporate misrepresentation. There is some evidence that companies responded to Sarbanes–Oxley by adopting more conservative financial reporting policies. Stronger internal controls may have been successful at checking obvious accounting rule violations.