Describe what is meant by the phrase “earnings management” and briefly describe how it is measured.
Is the tendency to engage in earnings management affected by corporate governance? If so, how?
Earnings management
Earnings management is a concept wherein we use various accounting
techniques to produce financial reports that make the financial
statements of the company look better. While preparing the accounts
of the company, many accounting rules and principles are used. Some
of these requires the management to make various judgments to
follow these accounting rules and principles. Earnings management
takes advantage of how these accounting rules and principles are
applied and creates financial statements that inflate earnings,
revenue, or total assets.
Some examples of such accounting rules and principles are
1) Recoginzing the inventory - FIFO Method or LIFO Method
2) Method of charging depreciation on the asset.
The financial statements represents the financial position of the
company and it is used by the outsiders to know about the company.
So, potential investors and creditors look at them to make the
decisions such as whether or not to lend the company money or to
become an investor, when to sell or purchase the shares. Thus the
management of the company may be aligned to show the financial
statements of the company as lucrative as possible.
Also, in various companies there may be policies for the management
employees wherein they receive bonuses on the basis of earnings
performance. Some employees may get bonuses or commissions when the
stock pries of the company rises. So the management of the company
can be inclined towards the earnings management.
Describe what is meant by the phrase “earnings management” and briefly describe how it is measured. Is the tendency to engage in earnings management affected by corporate governance? If so, how?
Describe what is meant by the phrase “earnings management” and briefly describe how it is measured. Is the tendency to engage in earnings management affected by corporate governance? If so, how?
Define the phrase "earnings management" and distinguish between earnings management and fraudulent accounting? Under what circumstances, if any, is it acceptable for corporate executives to employ earnings management tactics?
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