Income Smoothing: Management Consequences and Auditor Responsibilities in the Case of Beazer Homes

This case provides students with a real world example of alleged income smoothing and its consequences. Students learn how earnings were allegedly manipulated, why they were allegedly manipulated, and what the ultimate results of these alleged tactics were for the company. They are asked to analyze the earnings management techniques used and identify ways in which the auditors might have identified the activity and how their audit planning could have been modified given the industry-specific risks and the requirements of SOX. The case raises issues related to internal controls, auditor responsibility and professional and ethical principles and standards.