Question

ABC Company is manufacturing company based in the UK. CEO Steven King has been with the company for 9 years and his remuneration package have been reviewed by the board of directors five years ago, for which the board decided to increase Steven’s pay from 15 million to 20 million on the condition that firm’s financial performance reaches certain target, i.e. maintain a profitable level of 700 million. Below are the key performance figures (in millions) of ABC Company for the past 10 years:

Year Total Accruals Sales Property Plant and Equipment Total Assets Earnings
2009 -1237 47298 19800 30164 2124
2010 -1011 54327 23200 46053 2161
2011 -1323 56910 24200 46023 2327
2012 -3222 60931 24400 47206 2655
2013 -1121 64539 25700 50781 2806
2014 -1952 64826 24900 50129 824
2015 -4603 63557 24500 50164 974
2016 -4947 62284 20400 44214 700
2017 1871 54433 17900 43904 701


If you are a forensic accountant, who has been assigned to investigate company’s accounts, did the company manage earnings in 2017?


Please explain the steps on how you detect earnings management for ABC company.
Discuss the results with possible earnings management.
Discuss what incentives to drive CEO to manage earnings.

Answer 1

The remuneration of CEO was decided 5 years ago i.e on 2013 in that time the earning was 1121 from 2014 the earning increased . in 2014 the earning increased by 74% i(1952-1121/1121*100)

and agin in the following years the revenue increase even though in the last year the revenue reduced but still it is more that 700 million so CEO is eligible for the increased pay of $20 million,