Title: Do US electric utilities use industry-specific generally accepted accounting principles to manage earnings?

Authors: Joseph B. Omonuk; Jean Baptiste Koffi Dodor

Addresses: Department of Accounting, Finance and Economics, College of Business, Southern University and A&M College, Baton Rouge, LA 70813, USA ' Department of Accounting, Finance and Economics, College of Business, Southern University and A&M College, Baton Rouge, LA 70813, USA

Abstract: The study investigates whether rate regulated electric utilities use discretion (available under industry-specific GAAP) to manage earnings. We examine the following question: "Do electric utilities use industry specific GAAP to manage earnings?" Using a sample of electric utility firms, we estimate the earnings management metric, discretionary accruals by time series accrual expectation models and regress it against regulatory assets. Results indicate a negative relationship between discretionary accruals and regulatory assets. We interpret this finding to mean that rate regulated electric utilities use regulatory assets that is a creation of industry-specific GAAP. Results of this study are important to academia, accounting standard setters and public policy managers. First, the study contributes to earnings management literature. Secondly, the results should inform accounting standards setters about discretion in the application of accounting standards. Finally, public utility commissions should be aware of opportunistic earnings management using industry-specific GAAP to achieve rate increases.

Keywords: earnings management; rate regulated utilities firms; industry specific GAAP; discretionary accruals; regulatory assets; US electric utilities; accounting principles; USA; United States; accounting standards.

DOI: 10.1504/IJEA.2016.078295

International Journal of Economics and Accounting, 2016 Vol.7 No.2, pp.101 - 115

Received: 13 Feb 2016
Accepted: 18 Feb 2016
Published online: 14 Aug 2016 *

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