2.0 What is Earnings management?
2.1 Definition of earnings management
2.2 Earnings management: Its euphemisms
3.0 Implications of Earnings management in the corporate world of finance and business 3.1 How widspread is Earnings Management?
3.2 How Earnings Management is attained?
4.0 Accounting Earnings Management in the corporate world of finance and business 4.1 Accounting Choices
5.0 Earnings Management and the fraud issue in corporate world of finance and business 5.1 Cases of Fraud
6.0 Conclusion and personal response to the implications of earnings management
Nowadays, in our current accounting practices, earnings management has become a pressing issue. Stakeholders are sometimes misled by managers about the underlying performance of a firm. Moreover, managers may sometimes influence contractual outcomes are dependent on reported accounting figures by using judgements in financial reporting and in structuring transactions in order to alter financial reports. Consequently, earnings management may lead to a set of financial statements that do not provide a true and fair representation of the commercial activities of a corporation. The reasons for earnings management are diverse and range from the intention to satisfy analysts’ expectations to incentives to realize bonuses, or to maintain a competitive position within the financial market. We speak of legal earnings management if financial reports are adjusted in line with financial reporting standards. Earnings management becomes fraudulent financial reporting (cooking the book) when it falls outside the bounds of generally acceptable accounting practice (GAAP). The main objectives of this assignment is
to clearly understand what earnings management is all about, to explore the implications of earnings management in the corporate world of finance and business, the limits and consequences of its current practices and to see what implications does earnings management have with fraud and examples of frauds that have occurred.
2.0 What is Earnings Management?
By a first glance at the phrase ‘earnings management’, we can deduce that it is the management of a firm’s earnings. Before diving into what earnings management means, it is essential that we first know what earnings are, in the point of corporate world of finance and business. Earnings, also referred to as profit, bottom line or net income, are the indications showing the level of engagement of a company in value-added activities. They are a signal that helps direct resource allocation in capital markets. Earnings are often the most important determinant of a stock’s price. In fact, the theoretical value of a company’s stock is the present value of its future earnings. Increased earnings represent an increase in company value while decreased earnings indicate a decrease in that value. We can clearly see how earnings are of utmost importance to a company. Consequently, it is not surprising that company management has a vital interest in how they are reported. In this aspect, every executive must be aware of the effects of their accounting choices so that they can make the best possible decisions for the company. They must, in other word, know how to manage earnings.
2.1Definition of Earnings Management
Earnings management may be defined as the process by which management can potentially manipulate the financial statements to represent what they wish to have happened during the period rather than what actually happened (Scott 2009). Earnings management occurs in corporations where managers attempt to present a more favourable financial picture of the company performance through discretionary accruals (Aini, Takiah, Pourjalali & Teruya, 2006). In the point of view of some relevant standard setters(e.g IASB), Earnings management occur when managers use judgement in financial reporting and structuring...