An organized institutional structure or mechanism for creating and exchanging financial assets. Financial Numbers Game The use of creative accounting practices to alter a financial statement reader's impression of a firm's business performance.
The flexibility of accounting standards may cause some variability in earnings to occur as a result of the accounting choices made by management. However, earnings management that falls outside the generally accepted accounting choice boundaries is clearly unethical. The intent behind the earnings management also contributes to the questionable ethics of the practice.
Some managers use earnings management as a means of deceiving shareholders or other stakeholders of the organization, such as creating the appearance of higher earnings to increase compensation or to avoid default on a debt covenant.
The intent to use earnings management to deceive stakeholders implies that it can be unethical, even if the earnings management remains within the boundaries of GAAP or IAS.
It has also been defined as the misuse of discretionary judgment in financial reporting and in the way transactions are structured to either mislead stakeholders or to influence the outcome of negotiations, such as contracts, with third parties.
Another definition of earnings management indicates that it involves choosing a method accounting for or structuring a transaction that is either opportunistic or economically efficient. The common elements in the definitions of earnings management related to ethics are the intention of the action and the consequence of the action.
The definitions imply that earnings management may be ethical in some situations when the intention is to provide a benefit and the earnings management results in an actual benefit. It is difficult, however, to reconcile earnings management with ethical behavior because it involves accounting manipulation to produce the appearance of a stronger financial position of the firm than may actually be the case.
The most common approaches to earnings management involve a choice of accounting treatment that results in higher earnings. For example, the revenue recognition policy adopted by the firm could result in improper matching of income and expenses for a transaction, with the income accelerated into the current period while the expenses are accounted for in a future period.
This creates the appearance of higher income. Another common approach is to use an inflated estimate of the value of an asset when the accounting standards permit estimation.
A less common approach is to structure transactions in a way that increases current income or current assets, but postpones costs or liabilities. An example of this type of structured transaction approach to earnings management is issuing contingent convertible debt instruments that do not dilute earnings per share until the contingency occurs at some point in the future.
Earnings management breaches the specific and general duties of managers to shareholders because it conceals or alters information that investors, creditors, and other stakeholders should know about an organization to make an informed decision, providing a benefit for one group of stakeholders at the expense of the information needs of another group of stakeholders.
As a result, earnings management increases the possibility that managers will breach a duty to the shareholders. Earnings management used to create the appearance of higher corporate earnings in order to increase compensation for managers, or to reduce shareholder criticism for failing to meet earnings expectations, places the personal interests of the manager above the interests of the shareholders.
As a result, it is a breach of the general duty owed by managers to the shareholders. When examined from deontological perspective, earnings management that provides a temporary benefit to the shareholder is also a breach of the fiduciary duty of managers.
Earnings management intended to influence the decisions of creditors that may benefit shareholders could result in harm to all stakeholders when the actual financial condition of the firm becomes apparent.
The negative effects of earnings management on all stakeholders over the long run suggest that any form of earnings management inherently involves a breach of fiduciary duties that can lead to harm to all stakeholders. General Electrics has yet to admit ever practicing earning management, but it is believed that they are an aggressive practitioner.
The use of earnings management helped GE smooth out any bumps or declines in their earnings, therefore, creating a steady increase. Enron became famous for abusing earnings management.Accounting Values versus Market Values and Earnings Management in Banks Dan Galai* Eyal Sulganik** Zvi Wiener* July * School of Business, The Hebrew University of .
easy a. Expenditure management b b. Earnings management c. Top-line management d. Management-by-objective 7. easy _____ is a form of earnings management in which revenues and expenses are shifted between periods to reduce fluctuations in earnings.
c a. Fraudulent financial reporting b. Expense smoothing c. Income smoothing d. What is the boundary between earnings smoothing or earnings management and fraudulent reporting? +; [email protected] Question 2. What is the boundary between earnings smoothing or earnings management and fraudulent reporting?
Question 3. Why were the actions taken by WorldCom managers not . Chapter 6 Earnings Management. Government Budgetary Arena The following statement, though perhaps a bit accounting” is “fraudulent reporting.” boundary of the GAAP oval in Exhibit into the area of fraudulent financial reporting.
What is the boundary between earnings smoothing or earnings management and fraudulent reporting? 4. Why were the actions taken .
What is the boundary between earnings smoothing or earnings management and fraudulent reporting? 3. Why were the actions taken by WorldCom managers not detected earlier?.