Earnings management is typically regarded as a bad thing. I will cover why it’s considered a bad thing, and what it entails. When an executive “cooks the books” it’s referring to them providing false information in order to deceive other important employees or shareholders. This act includes, but is not limited to: falsifying receipts, inventories, balance sheets, and/or cash flow statements. This is an important concept to familiarize yourself with because, if identified and stopped in time, could save yourself or your company from not only criminal charges, but from shutting down altogether. Companies that did not stop this from happening, or went “with the flow” of things, ended up going bankrupt when it became public, as stock holders saw that the share prices were inflated because of false earnings. As a result, these companies were shunned from the business world and withered away into nothing. Don’t let this happen to your business.
Earnings management is something that all businesses consider practicing at one point or another. Before diving into what Earnings Management is, I’ll first explain what the definition of Earnings is. Earnings are the profits of a particular company. Investors and shareholders analyze earnings before deciding whether or not to invest in the company. Because of this, companies know that their earnings play a major part of determining if their company stays afloat. Companies will use different methods of accounting to cloud the differences between reality and said company’s projections. The spectrum goes from conservative to overly aggressive to fraud. The conservative accountant will use the most realistic numbers and typically provide the lowest earnings results; As such, the overly aggressive accountants yield the “best” results, albeit usually inaccurate.
There are several reasons behind managing your earnings. One commonly accepted incentive for the consistent over-reporting of corporate income, which came to light in...
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