Earnings Management in Response to a Windfall Tax in the Water and Sewerage Utility Companies in England and Wales
Lancaster University Management School Working Paper No. LUMSWP2003/017
41 Pages Posted: 23 Jun 2003
Date Written: June 10, 2003
This study examines whether the ten Water and Sewerage group Companies (WaSCs) in England and Wales used accounting accruals to decrease earnings and in turn reduce political costs in response to the Windfall Tax. In particular, this study encompasses a sample period when there was widespread speculation about a potential Windfall Tax and the 'monopolistic' level of utility company profits. Therefore considerable incentives existed for managers to use the accounting discretion available to them to reduce potential political costs. The results show that WaSCs did not use income-decreasing earnings management in response to the Windfall Tax in the year prior to the 1992 or the 1997 General Election. In contrast the evidence obtained in this study suggests that income-increasing accruals were adopted. The results suggest other pressures were more important to these large group plcs than the threat of politically imposed wealth transfers.
Keywords: accounting accruals, earnings management, water and sewerage companies, windfall tax
JEL Classification: C23, H29, L43, L59, L99, M41, M43
Suggested Citation: Suggested Citation