Financial statements provide useful information to a wide range of users. These users include shareholders, owners, investors, suppliers, managers, government and creditors etc. Many users rely on the information from financial statements to make decisions. Therefore, financial statements should be relevant, provide faithful representation, comparability, verifiability, timeliness and understandability. However, there are different evidences of managers manipulating the earnings for various reasons. “Earnings management is the choice by a manager of accounting policies, or real actions, affecting earnings so as to achieve some specific reported earnings objective” (Scott, 2012, p. 423). Managers play an important role in the company because they have control over the accounting policies, thus, the managers can manipulate the income. There are different viewpoints about earnings management. Some people think it will protect the company’s interests to allow the managers to manage the earnings, and others oppose it.
There is a good side and bad side of earnings management, and each side of earnings management will lead to different outcome. This paper is going to present some of the motives why managers use various method to manage the income, explain the benefits and costs of allowing managers to manage earnings for the companies.
Motives of Earnings Management
There are reasons and motives for managers engage in earnings managements. Many studies presented that mangers would manage earnings for personal interests, companies’ interests or both interests. Scott (2012) summarized the earnings management methods as taking a bath, income minimization, income maximization and income smoothing. Managers u...
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...85-107. Retrieved from http://sites.fas.harvard.edu/~ec970lt/Readings/April_25/Healy%201985.pdf
Magrath, L., & Weld, L. G. (2002). Abusive earnings management and early warning signs. The CPA Journal. Retrieved from http://www.nysscpa.org/cpajournal/2002/0802/features/f085002.htm
Munter, P. (2001, January 17). SEC sharply criticizes “earnings management” accounting. The journal of corporate accounting and finance. Retrieved from http://www.csus.edu/indiv/l/lundbladg/ACCY%20113/113_WA/SEC%20Sharply....pdf
Llukani, T., & Karapici, V. (2013). Earnings management: Obvious phenomenon in albanian market. Academicus, (8), 78-88. Retrieved from http://libezproxy.nait.ca/login?url=http://search.ebscohost.com.libezproxy.nait.ca/login.aspx?direct=true&db=a9h&AN=88925562&site=ehost-live&scope=site
Scott, W. R. (2012). Financial accounting theory (6th ed.). Toronto, ON: Pearson.
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