Earnings Management

Accounting is one of the most important parts of a business. Accounting information help investors predict the cash flows of the company and help them estimate their risk in investing in them. Shareholders of a company have a right to demand information about the financial stability of the company and managers satisfy this requirement with accounting information and reports (Ronen and Yaari 7). Earnings management has been a very controversial topic among business enterprises. In the accounting world, earnings management is increasing becoming an area of interest to many people including government regulators, SEC and stakeholders. Earnings management is defined as the use of accounting techniques to produce financial reports that may paint an overly positive picture of a company’s financial position (“Earnings Management” 1). Ethics and integrity are key aspects of earnings management and people believe that professionals that use earnings management to manipulate their company’s financial standings are not being ethical nor do they have integrity. Much research has been done to understand what drives companies to use earnings management and the methods that are used. Even though companies believe that using earning management will help them shine in the eyes of their stockholders, using it may bring many negative consequences. Training our future accountants and teaching them how to make ethical decisions regarding earnings management is key and should be integrated into their education. This is very important because at the end, using earnings management affects the quality of earnings being reported and manipulates many groups of people.

As defined before, earnings management occurs when managers use judgment in financial reporting and in structuring transactions to alter financial reports to either mislead some stakeholders about the underlying economic performance of the company, or to influence contractual outcomes that depend on reported accounting