Question

Date: Questin1 What ane the ways ta Prevent eaning manage ment

Answer 1

Constraint on AM (Suggestions to reduce/eliminate EM) – but are they really effective?

a.Company law, accounting standards, GAAP: reduce or eliminate accounting options/managerial discretion
b.Regulators (e.g. FRRP in UK; SEC in USA): may force restatements or take enforcement action. But company Will always finds loophole to exploit
c.Auditors: ca have an impact on EM?
i.Clients of big firm auditors are less likely to practise EM, but causality is unclear - these clients may choose big firm auditors rather than big firm auditors being more effective at preventing EM
ii.Audit quality is not uniform in Europe: UK auditors have a stronger bias to conservatism in reporting profits than auditors in France and Germany
iii.Auditors don’t prevent all EM even when they’re aware of it - they tend to be reluctant to challenge accounting treatments where accounting rules are imprecise
iv.Quality of auditors has effect on the degree of EM  
d.Internal governance mechanisms e.g. audit committees: limit managerial discretion, scrutinize appropriateness of accounting policies, estimates etc.
e.Analysts (including credit ratings agencies): can amend ratings or investment recommendations
f.Investors: may dump shares, force change or litigate