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- Title
'BIG BATH ACCOUNTING' USING EXTRAORDINARY ITEMS ADJUSTMENTS: AUSTRALIAN EMPIRICAL EVIDENCE.
- Authors
Walsh, Paul; Craig, Russell; Clarke, Frank
- Abstract
This article proposes a rigorous operational definition of big bath accounting and analyses whether listed Australian companies used extraordinary items (EI) adjustments, between 1971 and 1989, to facilitate big bath accounting. Prior to this paper no rigorous quantitative definition of big bath accounting had captured the quintessence of the phenomenon. While assertions of big bath activity had been numerous, definitional tests of it were awaiting development. This paper has provided a definitional test for big bath accounting in terms of statistical outlier theory and growth in reported net profit. The potential for creative accounting has been induced by the discretionary nature of extraordinary item adjustments. It was hypothesized that the onset of a big bath coincided with an unusually large extraordinary items adjustment. Furthermore, it was hypothesized, contrary to previous definitions, that the adjustments could be either positive or negative. These hypotheses were supported by an analysis of the accounts of a sample of 96 Australian companies over the period 1950-1989. The relationship between the size of growth in reported net profit and the amount of extraordinary items adjustment, on the occasions of big bath activity, was shown to be linear in terms of the ranks of these quantities. Thus, the greater the extraordinary items adjustment, the greater the intensity of the big bath.
- Publication
Journal of Business Finance & Accounting, 1991, Vol 18, Issue 2, p173
- ISSN
0306-686X
- Publication type
Academic Journal
- DOI
10.1111/j.1468-5957.1991.tb00587.x