Accounting research suggests that managers of firms with bonus plans are more likely to choose...

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Accounting research suggests that managers of firms with bonus plans are more likely to choose accounting procedures that shift reported earnings from future periods to the current period. In light of this finding, consider how managers might behave given the following situations:1. Earnings are far below the target level for the bonus.2. Earnings are just slightly below the target level for the bonus.3. Earnings are above the upper limit provided by the bonus plan; no bonus would be paid beyond this upper limit.

Robert · Accepted Answer

Answer: 
 Case I - Earnings are far below the target level for the bonus: 
When earnings are far below the target level for the bonus, managers possible would 
give the impression of being for all potential prospect losses that might be 
documented in direct to keep away from future amounts of paying back and reduction 
and other depreciation of outlook retribution. The identification of future costs and 
losses in the existing stage could stay away from identifying losses and expenses in 
the expectations. Managers therefore contain an encouragement to use accounting 
methods that will decrease reported retribution additional in expectation of advanced 
prospect earnings and advanced future bonuses.
Ref: F Glury, July-1998 “Earnings-based bonus plans and earnings management by 
business-unit manager” 
http://www.econ.au.dk/fileadmin/Economics_Business/Education/Summer_University_201
2/6308_Advanced_Financial_Accounting/Advanced_Financial_Accounting/4/Guidry_Leone_
Rock_JAE_1999.pdf
 Case II - Earnings are just slightly below the target level for the bonus:

Accounting research suggests that managers of firms with bonus plans are more likely to choose accounting procedures that shift reported earnings from future periods to the current period. In light of...

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