ABSTRACT:
Earnings management studies have been usually conducted through large database and large-scale empirical research, assuming financial misrepresentation as a consequence of certain anomalies in accrual trends (accrual earnings management) or in cash flows related with real business activities (real earnings management), without any consideration of the complex nature of financial misrepresentation in the real world accounting. In particular, the intent of altering financial reports to mislead some stakeholders about the economic performance of the company has never been directly observed, even if that intent is the crucial element of earnings management definition. Adopting a case study approach we focus on the intent to mislead stakeholders in order to understand if that intent can be clearly detected. In our case study we examine in detail the single case of Pirelli & C S.p.a., a global high value consumer tyre Italian public company, and a large family-controlled group. The company is characterized by stability in the leadership, and it is very active within mergers and acquisitions (M&A) and financial transaction (investments in subsidiaries and associates). We adopt a case study approach to gain more insight into the impairment test of an important investment in associates (Olimpia S.p.a.) studied over a multi-year period. Our findings demonstrate that the accounting choices can always be interpreted as the result of the manager strong will to disclose the actual situation of the firm (as it can be seen “through the eyes of management”), even if the choice enables to avoid impairment losses. Thus, managers can disclose financial numbers considering a long-term period rather than focusing on the actual evidence of losses that exist in a specific period of time (indication of impairment), and it cannot inevitably reveal the management intent to mislead the stakeholders about the economic performance of the company. On the contrary, the intent to mislead the stakeholders can arise especially when the subsequent actions (e.g. selling subsidiaries/associates) cause significant losses, but even in this situation a careful analysis and in-depth analysis of the “real world” is needed. Our findings also demonstrate that the research focused on the “intent to mislead” is a new area, and it contains many unanswered and interesting questions.
KEYWORDS: Earnings management, real world accounting, multi-year analysis
