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

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.