BIG BATH ACCOUNTING: MOTIVES, TECHNIQUES AND POSSIBILITIES OF PREVENTION

Abstract

The accuracy and trustworthiness of annual financial statements are critical for users to make sound and appropriate judgments. This reality has become a need in recent years, and its significance has increased as a result of the current financial crisis, which saw large financial institutions and other corporate entities fall and liquidate. Even though strict accounting standards exist to regulate financial accounting activities, it is often impossible to prevent the manipulative behavior of financial statement preparers who aim to influence the financial statement readers' decisions in their favor. Big bath accounting was created to give a more appealing corporate image and to attract as many investors as possible. This could happen as a result of organizational pressure on new management to admit failure or deficits because both old and new management sought to avoid such failures. When the prospective loss cannot be prevented in the present period, this technique can also recognize the costs in future periods and the loss in the current period. As a result, management takes a "huge bath" by deferring the cost estimates and clearing the desks. As a result, profits for the next period will be larger than they should be. The study concluded that big baths are one of the best earnings management techniques that suit management's interest in building investors' confidence without violating any accounting rules, though they are unethical and, if misused, can harm a company's reputation if discovered by users of such financial statements later.