Earnings Management.

December 23, 2020 By Swapnil Suryawanshi

Earnings management, in accounting, is the act of intentionally influencing the process of financial reporting to obtain some private gain.

Earnings management involves the alteration of financial reports to mislead stakeholders about the organization’s underlying performance, or to “influence contractual outcomes that depend on reported accounting numbers.

Earnings management has a positive effect on earnings quality,  and may weaken the credibility of financial reporting. Furthermore, in a 1998 speech Securities and Exchange Commission chairman Arthur Levitt

Occurrence and response by regulators :

Earnings management is believed to be widespread. A 1990 report on earnings management situations stated that “short-term earnings are being managed in many, if not all companies”,  and in a 1998 speech, Securities and Exchange Commission (SEC) chairman Arthur Levitt called earnings management a “widespread, but too little-challenged custom”.

Earnings Management (Definition, Example)| Top 3 Techniques

Is earning Management illegal :

Earnings management may be defined as “reasonable and legal management decision making and reporting intended to achieve stable and predictable financial results.” Earnings management is not to be confused with illegal activities to manipulate financial statements and report results that do not reflect economic reality.

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Is earnings management good or bad :

Earnings management is “bad“, in the sense that it reduces the reliability of financial statement information. … By using the financial statements to communicate the financial health of the firm, earnings management can be used to inform outsiders of management’s inside information as per their exercised expertise.

The Ethicality of Earnings Management - Strategic Finance

What is earnings management and why does it occur :

Key Takeaways. Earnings management refers to a company’s deliberate use of accounting techniques to make its financial reports look better. Earnings management can occur when a company feels pressured to manipulate earnings in order to match a pre-determined target.

“Increasingly, I have become concerned that the motivation to meet Wall Street earnings expectations may be overriding common sense business practices. Too many corporate managers, auditors, and analysts are participants in a game of nods and winks. In the zeal to satisfy consensus earnings estimates and project a smooth earnings path, wishful thinking may be winning the day over faithful representation.”
Earnings Management | What is Earnings Management? - Fincash

Types of Earning Management :

  • Revenue Recognition. There are many ways to manage revenue recognition, often stemming from complex, shifting operating environments.
  • Reserve Accounting.
  • Changing Accounting Principles.
  • Related-Party Transactions.
  • Write-Downs.

Occurrence and response by regulators :

Earnings management is believed to be widespread. A 1990 report on earnings management situations stated that “short-term earnings are being managed in many, if not all companies”,  and in a 1998 speech, Securities and Exchange Commission (SEC) chairman Arthur Levitt called earnings management a “widespread, but too little-challenged custom”.  In a 2013 essay, Ray Ball, while opining that accounting research was not reliably documenting earnings management, wrote: “Of course earnings management goes on. […] People have been tried and convicted.”