Debt covenant violations and managers accounting responses Assignment

Essays on Debt covenant violations and managers' accounting responses Assignment Debt-covenant Violation and Managers Accounting Responses al affiliation and number Debt-covenant  violation  and managers accounting responses, a journal article by Sweeney looks at the accounting changes, costs of default, and accounting-based covenants violated by 130 firms. Sweeney describes how managers achieve their goals of defaulting agreements through net worth and working capital restrictions as set by companies. Sweeney intensely explains the change in accounting procedures, the types of accounting procedures that undergo changes, the  appropriate  time managers make the changes, the extent to which the alterations affect the restrictiveness of accounting-based covenantsi. Sweeney keenly points out how managers change accounting procedures as they  opt  to respond to the tightening debt-covenant constraints. Sweeney explains  further  on how managers change accounting procedures in order to  reflect  the magnitude  of the earnings  effect  in cases of tightening debt-covenant constraint.  The earnings affect the  magnitude of the accounting changes need to relate to the magnitude of the change in the decline in liquidityii.  Majority of the losses and  dividend  reductions by defaulting companies  arise  in  order to  refrain itself from the binding covenants. Indeed, Sweeney affirms that managers  change  to income-increasing accounting procedures as the company encounters technical default. Sweeney laid down the  various  types of accounting procedures that undergo changes, in an  attempt  to ensure execution of contract violation is successful. Sweeney surveys how companies  alter  the depreciation and ICT methods in order to  violate  the contractual obligation. However, a default would have little opportunity to increase reported earning via changes in depreciation and ICT method. Companies  violate  the accounting procedures that include those of the preparations of the net-worth and working capital documentation. However, debt-equity ratio and income based covenants are least violated as they do not have a lot of  influence  on the company’s  violation  of debt-constraint agreement.  Even though adjustments  will  favor the company the charges on the debts will still  stand. Sweeney explains that there exists an appropriate time when the managers seek to  default  the contractual obligation. Sweeney explains how  uniformity  in default occurs within a control sample accounts for industry-wide accounting policies. Therefore, firms in the same  industry  always face similar contracting and financial reporting problems this eventually leads to uniformity in the application of accounting policiesiii. As a result, firms that operate in the same industry tend to change accounting procedures to  suit  them appropriately at the same time when all the other firms in the  industry  are set  to  execute  the default. Indeed, Sweeney concurs to the fact that there is  an extent  to which the alterations affect the restrictiveness of accounting-based covenants.  Sweeney keenly explains that a default is more  precise  when it leads to difficult situations  for companies  that have proven not to  oblige  to its agreement with the lending firm.  In addition, firms that tend to  default  face  restrictions in terms of accessing further borrowing that puts them in a bad  state  as they cannot  access  credit facilities. Sweeney explains that when managers change accounting procedures depend on whether the lenders will  impose  an interest rate on default cost for the company or notiv.  In this case, most companies will cautiously avoid default as it would  lead  them to an  extremely  worse financial position due to increased interest rates charged on outstanding debt. Indeed, Sweeney explains that managers of the companies that have loans should not  default  them as it would  lead  to  extreme  implications. Default of the debt-constraint agreement would affect the company’s financial position as it cannot gain access to  loan  facilitiesv. It is  crucial  for companies to fulfill its contractual obligation by observing the accounting procedures. Sweeney. A. (1994). Debt-covenant violations and managers’ accounting responses. North Holland. Journals of Accounting and Economics. 17 :281-308.