Variable Considerations in ASC 606, Earnings Management and Business Continuity during Crisis

Round 1

Reviewer 1 Report

Comments and Suggestions for Authors

Summary 

This study examines whether companies used the variable considerations in ASC 606 to manage their earnings in order to continue operating during the COVID pandemic. A questionnaire, distributed in April 2021,  was used to collect responses from 403 companies. 

The authors conclude that companies did indeed exploit variable considerations in ASC 606 to manage earnings to ensure their survival. 

General Comments 

Overall, the study appears to be well designed and executed.  

The authors should clarify the implications of their findings. The hypotheses carefully state that the tests are being performed to examine behavior during the COVID-19 pandemic.  However, elsewhere, the manuscript claims, or suggests, that the results can be applied to crises beyond the pandemic.  For example, The abstract includes the statement: “The results of PLS-SEM revealed that crises such as COVID-19 have highlighted the way in which variable considerations in ASC 606 were exploited to manage firms’ earnings in order to ensure their survival.” (20-22)  In the conclusions section, the manuscript states: “In addition, preparers can benefit from the use of variable considerations in ASC 606 as a tool to help their businesses in facing crises.”  (471-472)  The COVID pandemic was a highly unique crisis with far-reaching impacts on business operations. The findings in this study should not be generalized to apply to other crises. Moreover, crises come in many forms. A company’s response is likely to be influenced by the nature of the crisis and may differ across crises.   

The hypotheses use the term “positively affect,” which might be interpreted by some readers that the outcome is positive (e.g., variable considerations in ASC 606 lead to positive and beneficial earnings management practices).  I recommend adjusting the language to avoid this possible confusion.  For example, H1 might be restated as “Variable considerations in ASC 606 increased the use of earnings management practices in firms during COVID-19.”   Similar comments apply to the discussion of the results (e.g., lines 423, 448, and 457). 

Additional Comments

Line 3.  In the title, it would be helpful to replace “Crises” with  “COVID-19 Crisis.” 

Lines 125-127.  Wikipedia is cited.  Is this the most appropriate reference? Is there an original source that should be cited?  

Lines 350-351.  Additional details on the survey would be helpful.  What was the deadline for returning the survey?  How many survey requests were sent?

Table 1.  What is meant by “College Degree?”  Bachelor’s and post-graduate degrees are also generally considered college degrees. 

Author Response

Author Response File: Author Response.pdf

Reviewer 2 Report

Comments and Suggestions for Authors

Variable Considerations in ASC 606, Earnings Management and Business Continuity during Crises

Summary:

The paper discusses the impact of FASB's release of ASC 606, "Revenue from Contracts with Customers," to enhance transparency, provide fairer representation, and prevent revenue manipulation for earnings management. During the COVID-19 pandemic, businesses utilized variable considerations within ASC 606 to manage their earnings as a survival strategy. The study aimed to investigate the role of earnings management in mediating the influence of variable considerations in ASC 606 on firm continuity. The researchers collected 403 questionnaires from financial reporting preparers in US public shareholding firms and employed PLS-SEM for analysis. The results indicate that the COVID-19 crisis highlighted the use of variable considerations in ASC 606 to manage earnings and ensure the survival of firms.

The research question is interesting; the data and sample used in the study and the estimation approach seem appropriate. However, the paper struggles to keep a reader focused on the research question.

1. The second paragraph starts with a literature review, states, “A stream of literature has focused on the perspective of EM as a consequence of using accounting standards,” and cites multiple papers. This is a vague paragraph with an incomprehensible contribution. What kinds of accounting standards is it referring to?

2. The paper examines the relationship between variable considerations and going concern, with an emphasis on the mediating role of earnings management. It needs more explicit theoretical support.

3. The research hypothesis is presented on page 6. This should come earlier in the paper and guide how the rest of the sub-sections are presented. Readers would be interested to know what the paper is doing, backed by the literature. It feels that the paper provides many other materials first without focusing on the main content.

4.  The paper lacks clear organization. Section 2 needs to be reorganized and focus more on the key variable of interest. Then, Section 3 could focus on research methodology and present testable hypotheses. Moving some of the content from Section 2 to Section 3 would be helpful.

5. There are many grammatical errors and inconsistencies in tense. Here are a few examples.

a. Lines 53, 61, 69, 115, … and throughout the document. 

Comments on the Quality of English Language

It was challenging to follow along in many places.

Author Response

Author Response File: Author Response.pdf

Round 2

Reviewer 2 Report

Comments and Suggestions for Authors

I still think the hypotheses need to come earlier.

Comments on the Quality of English Language

I will defer the decision to the academic and language editors. 

Author Response

• Based on your comment number 4 “Section 3 could focus on research methodology and present testable hypotheses. Moving some of the content from Section 2 to Section 3 would be helpful.”, this was done in section (3.1: Research Model and Hypotheses Development)
• Regarding the language editing, we attached and invoice for the proofreading and language editing as evidence