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Big Bath
The strategy of manipulating a company's income statement to make poor
results look even worse. The big bath is often implemented in a bad year
to enhance artificially next year's earnings. The big rise in
earnings might result in a larger bonus for executives. New CEOs
sometimes use the big bath so they can blame the company's poor
performance on the previous CEO and take credit for the next year's
improvements.
For example, if a CEO concludes that the minimum earnings targets can't
be made in a given year, he/she will have an incentive to move earnings
from the present to the future since the CEO's compensation doesn't
change regardless if he/she misses the targets by a little or a lot. By
shifting profits forward - by prepaying expenses, taking write-offs
and/or delaying the realization of revenues - the CEO increases the
chances of getting a large bonus the following year.
The strategy of manipulating a company's income statement to make poor
results look even worse. The big bath is often implemented in a bad year
to enhance artificially next year's earnings. The big rise in
earnings might result in a larger bonus for executives. New CEOs
sometimes use the big bath so they can blame the company's poor
performance on the previous CEO and take credit for the next year's
improvements.
For example, if a CEO concludes that the minimum earnings targets can't
be made in a given year, he/she will have an incentive to move earnings
from the present to the future since the CEO's compensation doesn't
change regardless if he/she misses the targets by a little or a lot. By
shifting profits forward - by prepaying expenses, taking write-offs
and/or delaying the realization of revenues - the CEO increases the
chances of getting a large bonus the following year.
