Provisions: a tool for earnings management?

Abstract

Manipulating the annual account numbers can benefit every company, and lots of techniques are available to reach this aim. In Belgium, empirical data concerning the phenomenon of earnings management is rather rare, and perhaps the last “non-believers” have been convinced of its existence by the scandals around Lernout & Hauspie. Anyhow, one recent study (Vander Bauwhede et al., 2003) found that 39 listed Belgian companies do engage in income smoothing and manage earnings opportunistically to meet the benchmark target of prior-year earnings. In this paper, we examine whether the Belgian companies manage their earnings by focusing on their policy of provisions during the period 1997 - 2002. Concerning the technique of income smoothing, some proof has been found that companies engage in income smoothing by increasing or decreasing the provisions. What big bath accounting is concerned, no proof has been found, since companies do not seem to grant more donations to provisions in times of a declining profit figure.