Thanks, this is a good start. I also found that Doug Hanna had a couple of papers (both in JAR 1996 with different co-authors) about write-offs.

You sparked my interest in firms getting in trouble over special items. I looked in my course materials from the past and found a Wall Street Journal article from August 23, 2001 about Waste Management and pro forma earnings. To quote the article “The nation’s leading garbage-hauler, whose image was soiled two years ago by an accounting debacle, just beat earnings expectations for the second quarter. But to do that, the company asked investors to ignore a host of what it called ‘unusual expenses,’ including $1 million to paint its trash trucks and $30 million in consulting fees.”
“Exclusion of unusual expenses helped the Houston company report pro forma earnings of $212 million, or 33 cents a share, which was one cent ahead of Wall Street analysts’ consensus expectations, according to Thomson Financial/First Call. If these expenses had been treated as ordinary, Waste Management would have earned $191 million, or 30 cents a share.”

I do not recall if the SEC followed up on the WSJ article.

Attached find a short list of recent papers relating to special items. While by no means an exhaustive list of papers relating to special items, I think any of the authors listed below is qualified to talk about special items.

Special items, indeed, appear to have grown quite dramatically. Both Fairfield et al. and Riedl and Srinivasan report that the percentage of firms reporting special items in the period 2001-2003 is in excess of 40% (contrast with around 10% in the early 80’s). Raw annual numbers appear economically significant as well – around $400 billion in recent years. Frankel (2009) says that “we do not understand why the use of special items has increased over time.”

APB 30 defines extraordinary items as events and transactions that are distinguished (a) by their unusual nature and (b) by the infrequency of their occurrence, but I am unaware of any official definition of “special items”. Frankel (2009) contains a detailed discussion of the Compustat definition of special items.

As for the question whether the SEC ever contests the propriety of classifying an item as special, Riedl and Srinivasan present one case suggesting that the SEC does not go after companies very seriously “As an example, the SEC raised questions to IBM regarding its 1999 annual report, in which IBM aggregated a $4.06 billion gain from the sale of a subsidiary, which was identified in the footnotes but presented as an offsetting item within SG&A on the income statement. However, the matter was subsequently dropped, and IBM was not required to amend its filings.”

Hope this helps.

Shankar

References

Frankel, R., and S. Roychowdhury. 2008. Are All Special Items Equally Special? The Predictive Role of Conservatism. Working Paper, Washington University at St. Louis.

Frankel, R. 2009. Discussion of “Are Special Items Informative About Future Profit Margins?” Forthcoming Review of Accounting Studies.

Fairfield, P. M., K. A. Kitching, and V. M. Tang. 2009. Are Special Items Informative About Future Profit Margins? Forthcoming Review of Accounting Studies.

McVay, S. 2006. Earnings Management Using Classification Shifting: An Examination of Core Earnings and Special Items. The Accounting Review 81 (3):501-531.

Riedl, E. J., and S. Srinivasan. 2009. Signaling Firm Performance Through Financial Statement Presentation: An Analysis Using Special Items. Forthcoming, Contemporary Accounting Research.