Detecting ‘Big Bath’ Accounting in the Wake of the COVID-19 Pandemic

Can Traditional Financial Metrics Find Earnings Management?

Donald Frey, CMA, and Brandy Havens, CPA, and Alfred C. Greenfield, PhD

In BriefAs many companies deal with the aftermath of declining sales and reduced profit margins associated with the COVID-19 pandemic, management may be tempted to engage in an earnings management technique commonly termed “big bath” accounting. Using this approach, management intentionally overstates losses in order to present more favorable results moving forward. Given the increased risks over the past couple of years, all stakeholders should remain diligent and exercise professional skepticism when evaluating financial results. By closely examining the components and trends of common financial metrics for liquidity, leverage, efficiency, profitability, and market value, stakeholders can better gauge a company's operating performance and financial condition while potentially detecting management manipulation through big bath accounting.