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Review of Quantitative Finance and Accounting

, Volume 46, Issue 3, pp 633–660 | Cite as

Earnings management in the electric utility industry: profit incentives

  • Shiyou LiEmail author
  • Emeka Nwaeze
  • Jennifer Yin
Original Research

Abstract

Electric utilities face profit regulation tied explicitly to accounting data. Under existing rate structure, the utilities are required to provide periodic and specialized accounting reports for use in rate decisions. Consumer groups and opponents often criticize the rate structure alleging possible alteration of accounting reports by utilities to gain favorable regulation. Nonetheless, there is little empirical evidence supporting the allegation. This study investigates profit incentives for earnings management by utilities seeking rate increases. Specifically, this study investigates whether electric utilities proactively adopt profit-reducing actions before and during rate requests. The results are consistent with strategic use of accounting methods to reduce reported profits immediately before and during rate requests. The evidence supports the notion that utilities reduce profits just before and during rate reviews to relax regulatory constraints and improve profit opportunities.

Keywords

Electric utility Earnings management Profit incentive 

JEL Classification

L94 M41 

Notes

Acknowledgments

The paper benefited from comments and suggestions by two anonymous reviewers, Sharad Asthana, Jeff Boone, Dana Forgione, Jim Groff, Carlos Jimenez, participants, discussants, and anonymous reviewers at the 2012 American Accounting Association Annual Meeting, and workshop participants at Rutgers University and the University of Texas-San Antonio. Financial support for the Project was provided by the College of Business and Entrepreneurship at Texas A&M University Commerce and by the College of Business at the University of Texas San Antonio.

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Copyright information

© Springer Science+Business Media New York 2014

Authors and Affiliations

  1. 1.Department of Accounting, College of BusinessTexas A&M University CommerceCommerceUSA
  2. 2.Department of Accounting, College of BusinessUniversity of Texas at San AntonioSan AntonioUSA

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