Q1: How does big bath accounting work?
The big bath accounting starts with writing off expenses and substantial assets that do not align with the
actual operation situations. The most common examples of tactics used in big bath accounting are special
one-time charges, sale of discontinued operations, accelerated depreciation of inventory, plant and
equipment, write-off of bad investments, restructuring charges, etc. By overstating the expenses in the
current year, the company could have fewer expenses in the future operations, thus increasing future
earnings significantly and naturally. The big bath accounting differs from the tactics used for tax benefits,
which is legal. The big bath accounting aims to boosting the performance bonuses in the subsequent year,
which is malicious from the very beginning.
Q2: When does big bath accounting (normally) occur?
The big bath accounting usually occurs when a company’s current year performance is very terrible and is
not possible to meet the earning expectations at all. And in the following years, the company have record-
breaking earnings which are incompatible with its performance before.
Q3: What are management’s primary incentives to take a ‘big bath’?