Earning Management

Topics: Generally Accepted Accounting Principles, Financial statements, Income statement Pages: 8 (2334 words) Published: June 15, 2013
Earning Management|
Quality of Accounting Information|
Nur Mohammad Arif|

A report on
Earning Management & Quality of Accounting Information

Subject: Accounting Principles

Nur Mohammad Arif| 131-0647-660|

Earning Management & Quality of Accounting Information
ABSTRACT: This group report contains a simple descriptive analysis on the Earning Management and Quality of Accounting information for users. Business, Investments, Profit & Loss these words are so much related when we say Accounting. In doing business it’s important to keep the records for different purposes i.e. decision making, attracting investors. However, managers often try to do some engineering with the accounting information. Earnings management is a strategy used by the management of a company to deliberately manipulate the company's earnings so that the figures match a pre-determined target. This practice is carried out for the purpose of income smoothing. To make the report trustworthy, it’s the responsibility of managers to maintain certain qualities & standards. The Financial Accounting Standards Advisory Board (FASB) establishes and maintains generally accepted accounting principles (GAAP) that set forth the qualities and standards of accounting information. Unless a company’s accounting records meet GAAP standards, an auditor cannot certify the company’s records.

“Earning Management” refers to those accounting practices that may follow the letter of the rules of fundamental rules of accounting practices but unethically misrepresented to the users of accounting information. For the personal interest managers often try to show outstanding performance of the business and use the strategic way to falsify Income, Assets or Liabilities. Earning Management as generally understood refers to systematic misrepresentation of the true income and assets of corporations or other organizations. "Creative accounting" is at the root of a number of accounting scandals, and many proposals for accounting reform – usually centering on an updated analysis of capital and factors of production that would correctly reflect how value is added. Quality of accounting information is one of the Fundamental Concepts of Accounting Framework. Where it’s mentioned that, accounting information must be Relevant, Reliable, Comparable, and Consistent & Comparable (Intermediate Accounting by Keiso, Weygandt, Warfield, 12th edition). Unless having these qualities a report cannot be treated as qualified. "Managers that always promise to "make the numbers" will at some point be tempted to make up the numbers". – Warren Buffet

Definition of Earning Management
* Managing earnings is “the process of taking deliberate steps within the constraints of generally accepted accounting principles to bring about a desired level of reported earnings.” (Davidson, Stickney and Weil (1987), cited in Schipper (1989) p. 92) * Managing earnings is “a purposeful intervention in the external financial reporting process, with the intent of obtaining some private gain (as opposed to say, merely facilitating the neutral operation of the process).”… “A minor extension of this definition would encompass “real” earnings management, accomplished by timing investment or financing decisions to alter reported earnings or some subset of it.” (Schipper (1989) p. 92). * “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 numbers.” (Healy and Wahlen, 1999, p. 368) Motivators Earning Management

* Meet financial analysts' estimates of earnings that leads to performance-based compensation * Raise the stock price thereby enhancing the value of stock options * Smooth net...
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