The Effects of Sarbanes-Oxley on Reporting Profits

David Aron Smith
2015 Journal of Accounting & Marketing  
This paper looks at the effects of Sarbanes-Oxley on the practice known as Earnings Management. Using earnings as reported in quarterly corporate filings, I employ a test of discontinuity used by DeGeorge, Patel and Zeckhauser to estimate the discontinuity in reported earnings per share (EPS) following a major accounting reform resulting from Sarbanes-Oxley. I find that the previous discontinuities found in the literature in reported EPS at 0¢ and 1¢ disappear after the accounting reform. Using
more » ... a standard market model on security prices, I also find that short-term abnormal returns to reporting 1¢ EPS decrease following this reform, which could indicate positive shortterm returns to Earnings Management. The author can be contacted at I would like to thank Larry Brown, Ilia Dichev, Gene Fama, Joseph Gerakos, and Richard Hahn for their helpful comments. The author is willing to share all data used for this analysis. 1 See, for example: Baber and Kang [15,16]; Beatty, Ke, and Petroni [17]; Beaver, McNichols, and Nelson [18]; Brown and Caylor [19]; Collins, Pincus, and Xie [20]; Easton [20]; Gunny, Jacob, and Jorgensen [21]; Holland and Ramsay [22]; Jacob and Jorgensen [23]; Kerstein and Rai [24]; Keung, Lin, and Shih; Melumad and Nissim [25]; Phillips et al. [26]; Rego and Frank [27]; and Revsine et al. [28]. 2 PCAOB Auditing Standard No. 1 requires that auditors' reports on audits and other engagements relating to public companies and other issuers include a reference that the engagement was performed in accordance with the standards of the PCAOB. This replaced the previous reference to generally accepted auditing standards.
doi:10.4172/2168-9601.1000124 fatcat:ryholusbabd7dn76dihofedqre