Summary for the article Healy (1985): The effect of bonus schemes on accounting decisions. This is a mandatory article that IBA students will have to study for the exam Accounting (BSc International Business Administration VU).
The summary also consists of a couple of old exam questions that ha...
Summarized .................................................................................................................... 1
Key formula ..................................................................................................................... 3
Sample design.......................................................................................................................... 3
Collection of financial data ....................................................................................................... 3
Contingency tests and results ................................................................................................... 4
Limitations of the contingency test ........................................................................................... 5
Conclusions ............................................................................................................................. 6
How I would study this, step by step procedure in my words............................................. 7
Discussion 3 Question 2B ................................................................................................. 7
Summarized
Bonus plans:
What do you prefer as manager when your earnings without your discretionary decisions is
in region LOW, MID, or UPP?
• LOW: if close to starting bonus: try to increase earnings
• MID: increase earnings to increase bonus
• UPP: Lower earnings
Total Accruals = Non-discretionary accruals + discretionary accruals
Look at Total accruals
Limitation: not all accruals can be ‘manipulated’
Study: how do these accruals relate to the manager’s bonus plan?
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Expectation if managing earnings:
LOW: low accruals
MID: high accruals
UPP: low accruals
The author tests the association between managers' accrual and accounting
procedure decisions and their income-reporting incentives under bonus plans. The
study examines typical bonus contracts, thus providing a complete analysis of the
effects.
The theory is tested for a sample of 94 companies.
Two classes were tested:
1) Accrual tests
2) Tests of changes in accounting procedures
Accruals are defined as the difference between reported earning and cash flows from
operations.
The author also tests whether accruals differ for companies with different bonus plan
formats.
Tests using changes in accounting procedures suggest that managers' decisions to
change procedures are not associated with bonus plan incentives. However,
additional tests do find that changes in accounting procedures are related to the
adoption or modification of a bonus plan.
Examples of accounting bonus schemes given in the article are: deferred salary
payment, insurance plans, non-qualified stock options, restricted stock, stock
2
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