In a September 1998 speech, former Securities and Exchange Commission Chairman Arthur Levitt used the term cookie-jar reserves to describe a “cooking the books” technique used by some publicly owned companies to manage earnings. The technique involved establishing fictitious liabilities for bogus expenses or realized and earned revenues in a highly profitiable quarter or fiscal year, and reversing the liabilities in subsequent low earnings periods.

Instructions

a. Obtain and study SEC AAER 1140, “In the Matter of W. R. Grace & Co., Respondent”

(June 30, 1999) and describe the “cookie-jar reserves” technique used by Grace.

b. Review the Staff Accounting Bulletins issued by the SEC subsequent to June 30, 1999, and briefly describe the provisions of a Bulletin dealing with the Grace matter and the SEC staff ’s resultant requirements.