Earnings Management Case Study

Schipper (1989) gives a well accepted definition of ‘earnings management’. According to him, the managers of a company often intercede in the external financial report of the firm and thus they safeguard their personal interests. This process of managerial intervention in the annual reporting process is better termed as earnings management. After a decade, in 1999 Healy and Wahlen, echo the same and affirm that the manager’s discretionary power may well influence the accounting reports of a company. In the same line of discussion, Dechow and Skinner (2000) talk about ‘accrual accounting’; this according to them is one of the most frequently used device in earnings management. The managers often showcase the prospective growth of expenses and

As for example, Simon (2001) report that cultural differences influence the behavioural attitude of the managers of various countries. He finds that in sharp contrast to the Western managers, the management of the Thai firms do not favour the idea of disclosing their earnings management activities. Guan, Pourjalali, Sengupta and Teruya (2005) also document the idea that besides country-wise differences, there may be many other factors that can influence earnings management of a company. In a study, Eldenburg, Gunny, Hee and Soderstrom (2007) have shown that where the companies do not have publicly shared funds, the managers are prone to minimize the cost of debt capital and are in a way compelled to manipulate accruals with a view to maintain their outward reputation and

Hence, extensive studies are examining the behaviour of financially distressed firms in various countries, with respect to earnings management. Among the Asian countries, there has been extensive research on this subject in China (e.g. Chen et al., 2010; Liu and Lu, 2007; Chen et al., 2006a, b; Yu et al., 2006; Haw et al., 2005; Chen and Yuan, 2004). The study by Chen, Chien & Huang (2010) take evidence from the listed financially ill companies of China during the period 2002-2006. The research work implies that the coexistence of both state-owned and private companies in a transition economy like China, makes it necessary for the government to implement effective regulatory measures for controlling the practice of earnings management by the listed companies. The empirical study pin points the fact that it is the constant fear of getting de-listed or getting designated as ST (Special Treatment) companies, that drives and motivates the management of the distressed firms to undertake different earnings management mechanisms. The paper further adds that the management of the less regulated companies are more prone to manipulate their accounting policies in comparison to the strictly regulated