The SEC’s Nightmare on EPS Street

ABSTRACT This case examines the SEC’s use of data analytics through their Earnings Per Share (EPS) Initiative to identify companies for investigation of possible earnings management. In this case, we describe the six companies that have been charged with earnings management under the EPS Initiative. The primary case objectives are to (1) identify why companies engage in earnings management, understand the importance of transparency, and evaluate the adequacy of SEC penalties; (2) use t-statistic results to evaluate discretionary accruals; (3) use a 10-Q to form an explanation for a decrease in company earnings; and (4) assess and discuss challenges that may occur when using prior period information for analytical procedures. This case is most applicable for implementation in intermediate accounting, auditing, and data analytics courses. Data Availability: Data are available from the sources cited in the text.