Management Forecasts

Topics: Income statement, Stock, Generally Accepted Accounting Principles Pages: 3 (1002 words) Published: June 6, 2011
Article Summary
“Management Earnings Forecasts: A Review and Framework” by D. E. Hirst, L. Koonce and S. Venkataraman explained the antecedents, characteristics and consequences interlinked with earnings forecasts. Antecedents are characteristics that are prevalent prior to the consequence such as the existing environment/firm specific characteristics; and consequence is the outcome from antecedents and characteristics. Characteristics are the choices the management has deciding on how the report will be issued. The article guides the reader giving explanations of why management decides to release earnings forecasts, interactions of the three variables and its findings and how these findings may impact one period to another. Studies have found that management may issue forecasted earnings to reduce difference of opinions and/or information with the shareholders, to avoid litigation risks when the entity needs to make bad news disclosures and when managers have equity-based compensation tied to extend their wealth.

Case Summary
According to the case, “Management Earnings Disclosure and Pro Forma Reporting” by Mark T. Bradshaw and Jacob Cohen states that companies too often exclude information that negatively impacts the company’s earnings per share on their pro forma reports prior to releasing the financial statements that is in accordance with generally accepted accounting principles which is based on companies who have released such reports and the response to such reporting by the regulators.

According to the case, pro forma reporting was originated by the SEC to provide earnings comparability for investors for differing time periods based on a “what if” analysis, meaning, what would have happened if this transaction had occurred and what would’ve been its impact on later reporting periods (Regulation S-X 1982). However, multiple incidents have shown that companies abuse the system.

Proxim and Cisco, Inc., both released their pro forma reports...
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