Cookie Jar Reserves

Cookie Jar Reserves
Another deceptive approach commonly practiced by companies is the concept of cookie jar accounting. Companies typically set reserves to cover the estimated costs of taxes, litigation, bad debts, job cuts and acquisitions. Once the costs are incurred, the excess amount in the reserve can be reversed to boost earnings. Company managers estimate reserves and the outside auditor judges whether the reserves are reasonable. Cooki-jar reserves are popular because they provide a method of moving earnings from one year to the next. However, factors such as analyst expectations and stock price, executive bonuses and incentives, and debt covenant compliance can push management teams to abusively manipulate cookie jar reserves.
Reserves estimation becomes fraudulent when companies create bigger-than-need...