You are auditing Balforoni Waste, Inc., a publicly traded, solid waste disposal company that dominates the household and commercial hauling markets in the upper Midwest. In conversations with management following an analysts' conference-call meeting, management makes clear that, despite pricing pressures from local municipalities, unlikely success in renewing the permit on a major dump site, significant environmental remediation on closed landfills, and competition from national haulers, the company is committed to meeting First Call's consensus annual earnings estimate of \(\$ 1.10\) per share, an amount that exceeds the prior year's actual earnings by \(\$ 0.08\) per share. Consistent with their commitment, management reminds you that an industrial-cleaning subsidiary will be sold at a gain and that a new landfill is under construction in Michigan.

Management's incentive compensation is contingent both on earnings and on Balforoni's December 31 stock prices. For example, over the five years you have audited Balforoni, both the chief executive officer and the chief financial officer have earned about one-third of their compensation from salary and about two-thirds from incentives. You have no reason to expect that management necessarily has a disregard either for ethics or for the representational faithfulness that shareholders expect from financial statements. However, you learn that, in a study published in the October 1999 Journal of Accountancy, Heiman-Hoffman, Morgon, and Patton report that, of the warning signs of fraudulent financial reporting listed in SAS No. 82, "Consideration of Fraud in a Financial Statement Audit," practicing auditors ranked the following two as the third and eighth most important:

- Management places undue emphasis on meeting earnings projections or other quantitative targets.

- A substantial portion of management compensation depends on meeting quantified targets.

Required:

1. How do analysts' expectations affect share prices?

2. How could Balforoni management enhance reported earnings?