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How Does Sarbanes-Oxley Act Affects Earnings?

432 Words2 Pages

Financial statements include the company’s net worth based on assets and liabilities, as well as the company’s expense, earnings and operational budget. Users may use the relevant financial statements to make decision for future plan. In the beginning of 1934, Congress created the Securities and Exchange Commission (SEC) which delegates standard setting authority to the private sector. SEC was delegated responsibilities and encouraged the private sector to set the standard as the first standard setting body for the accounting (Group 1). In 2002, the Sarbanes-Oxley Act (SOX) is passed by U.S. Congress to protect shareholders and the general public form accounting errors and fraudulent practices, and to improve the accuracy of corporate disclosure. …show more content…

Earnings per share serves as an indicator of a company’s profitability. EPS has been the measurement of success of a company in the 1980’s. It’s the only ratio that is specified in GAAP as to how it should be calculated and it is calculated by dividing Corporate Income minus Preferred Dividend by numbers of Shares outstanding. Earnings surprise is called that when a company’s reported quarterly or annual profit are above or below analyst’s expectation. A positive earnings surprise can lead to a higher EPS while a negative earnings surprise can decrease EPS. Managers can manipulate financial information to achieve results and meet target sales or make similar aggressive interpretation in future quarters. Many earnings management techniques related to when expenses and revenue are recognized which directly affect net income. EPS is a strong factor for how a company is doing but investors shouldn’t rely on EPS. Arthur Levitt is former chairman of the SEC addressed that earnings management as a dire concern of his, and argued that management has been a problem for a long-term. (Group 6). In additions, company want to increase their earning management with a positive and stable financial results to draw investor’s attention. If investors look at pro formas along side of the GAAP reports they can gain a future understanding of the company (Group 8). If company’s earnings aren’t stable, it can be difficult for internal management to make key decisions (Group

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