Thursday, October 8, 2009

Is managing for USNWR rankings like "earnings management"?

Over on my own blog, I've commented on the yearly trend towards taking action to improve schools' USNWR rankings (see here).  Other blogs are also noticing some schools' moves.  TaxProf Blog noticed that some Texas schools are dropping the size of their classes, even in a time when budgets are an issue (see here).  And Brian Leiter has called "shenanigans" on some schools dropping their PT programs, now that PT programs are counted in the rankings (see here). 

If schools are changing their programs for good reasons--e.g., on the theory that smaller class sizes provide better learning experiences for students--I have absolutely no beef with those decisions.  But if schools are changing their programs to improve their rankings, and for no other reason, how different is "rankings management" from "earnings management," where businesses hide flaws in order to make themselves look "stronger" than they are?

(Posted by Nancy Rapoport)

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I agree completely. Law schools teach more loudly with acts than with lip service and for some time now they've been teaching students that cooking the books is what grown-up lawyers are expected to do.

Posted by: John Steele | Oct 9, 2009 8:46:34 PM

Nancy, while not taking anything away from your point that doing something merely for the sake of jumping several spots in the rankings is misguided, I want to quibble just a tad with the analogy to earnings management.

Earnings management is a conscious manipulation of the time period requirements in financial accounting to make it appear that results are smooth when in fact they are periodic. It can vary in its level of outright culpability. For example, loading up reserves in good quarters, and reversing them in bad quarters constitute nothing more than paper entries. What is known as "stuffing the channel" is a real act designed to increase sales in a period, usually at the cost of putting more receivables (versus cash) on the balance sheet.

But if a company decides in the interest of improving earnings to cut all research and development spending, in order to respond to how the market deals with short term metrics, we can call that misguided, but it's not earnings management.

I'm not sure about the class size thing. If it's sleight of hand, then the analogy works to earnings management (I'm not even sure how one could do that and fake it, but....) The dropping of part-time programs is misguided, in that it elevates a silly metric over the long term best interests of the institution (although you'd hear defenders, I suspect, justify it the same way defenders of dropping R&D defended that - "it's what the market demands").

The point is that earnings management is, classically, deceptive and unethical, whereas misguided business decisions are just stupid. I have no problem with the idea that law schools should not be living examples of either - but I don't think it's a trivial distinction.

Posted by: Jeff Lipshaw | Oct 10, 2009 1:38:08 AM

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