Abstract
This research was carried out to give an overview of relationship between income smoothing and stakeholders. Firms engage in earnings management in various reasons in various techniques. Any decisions or actions taken by any firms can affect their stakeholders. Stakeholders are those people who linked with the firm either directly or indirectly. Stakeholders can be classifies in two group which are, primary stakeholders and secondary stakeholders. Primary stakeholders are those engage directly with the firms, customers, creditors, employees and shareholders. Secondary stakeholders are those who does not engage with the firm directly, investors, media and public.
Introduction
Income smoothing is one of technique which managers of
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Income smoothing technique can be simplify as deferring revenue during a good financial year if future revenue is expected to be a bad financial year or either way, recognition of expenses are delayed due to the current year financial position not as good as near future year. In previous studies, Wild et al. 2001:120, “a purposeful intervention by management in the earnings determination process, usually to satisfy selfish objectives”.
Studies revealed that firms’ managers willfully manipulate reported to fit their own intentions by selecting accounting policies, changing accounting estimates and manipulating accruals (Yoon and Miller, 2002). And of course, the integrity of the firms’ managers due to meet their personal interest, incentives scheme or both. For example, to get a promotion from current position in firm, avoiding company tax payable and many other reasons which could benefits the firms and personal interests.
Literature
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DeFond and W.Park (1997), “Smoothing income in anticipation of future earnings”, it argues the reason the managers adopt income smoothing is to reduce the threat of job dismissal. The predictions are derived from theory in Fudenberg and Tirole (1995), suggests job security creates an incentive for managers to apply income smoothing in consideration of both current and future relative performance. In their findings, it is strongly supported investigations of links between the managers adopt income smoothing to reduce the threat of job dismissal due to poor performance in current year is positive. This studies using the Jones model (1991) to estimate discretionary accruals to estimate expected earnings. In this case, current earnings are ‘saved’ for possible use in the future.
An investigations of the income smoothing behaviour of growth and value firms, studied by Namazi and Khansalar (2011), investigates the income smoothing behaviour of two types of firms which are growth firms and value firms which are listed in Tehran Stock Exchange (TSE). Firms with a higher earning is identified as a value firm and the direction of growth firm is vice versa. The investors in value firm seek for a short term profit, compare to investors in growth firm, they seek for a long term
One look at the common-size income statements for these companies can tell a story. While Jones Apparel Group was lagging at year ended 1998, even with a restructuring charge on Liz Claiborne’s income statement, 1999 was a different story. Huge growth at Jones lead to revenues double of that one year ago while Liz, while increasing, was quickly falling behind. The growth for both of these companies continued into the year ended 2000, but Jones Apparel Grou...
In the year 2002, Adelphia Communications Corporation faced a massive accounting scandal that led to company’s bankruptcy and later reorganization. This paper will attempt to identify, analyze and evaluate the consequences of misrepresentation of financial accounts on a company, industry and economic level. Moreover, it will attempt to examine factors influencing the corporate failure from an auditor’s point of view, and consider the measures that auditor could have taken in order to enable quality and completes of information communicated to external users.
[17] Robert K. Elliot, CPA and John J. Willingham PhD, CPA, Management Fraud: Detection and Deterrence. New York: Petrocelli Books, Inc., 1980, pp. vii.
... tempted to falsely inflate earnings is to take away their personal gains, if the company's stocks go up. I believe that when upper level management has too much incentive based on personal financial gain, which is directly based on the performance of the company; it compromises their judgments. I think that upper level management should not be allowed to receive stock options or to even own stock in the company as the financial statements would provide a neutral, bias-free report. Management would have no reason to "cook the books." I also feel that any management who still decides to falsify documents needs to be held more accountable for their actions and receive tougher punishments. I think that these strict guidelines would help the people in the United States and people all over the world feel more confident in investing their money into the stock market.
This paper will discuss these steps in detail. Because I work at home, I am not currently involved in any of the steps of the accounting cycle. The examples I give in this paper will be from various jobs I have held in the past.
If they company thinks that the earning will fall, stocks will decrease; deterring from investors losing money these types of
Accounting fraud refers to fraud that is committed by a company by maintaining false information about the sales and income in the company books, when overstating the company's assets or profits, when a company is actually undergoing a loss. These fraudulent records are then used to seek investment in the company's bond or security issues. By showing these false entries, the company attempts to apply fraudulent loan applications as a final attempt to save the company by obtaining more money from bankruptcy. Accounting frauds is actually done to hide the company’s actual financial issues.
Financial controls can be useful to figure out performance problems or if the organization is on sound financial footing. Financial statements provide information used for financial control of an organization. There are two major financial statements, a balance sheet and an income statement. A balance sheet shows an organization’s financial position with keeping in mind assets and liabilities at a specific point in time. An income statement sums up a firm’s financial performance for a given time interval. The income statement shows revenues coming into the organization from all sources and subtracts all expenses, such as: goods sold, interest, taxes, and depreciation. A manager’s knowledge of their financial state can help them manage their employees more effectively and be able to see what needs to be done to create more revenue, which is the ultimate goal in business, making a
Auditors’ motivated blindness. It could be that this conflict of interest is the reason behind Arthur Anderson issuance of an unqualified audit report without questioning or recommending to the audit committee the treatment of the related party transactions (Tonge et al., 2003, p. 15), the appropriate disclosures to make or the reasonable assumptions of mark-to market accounting. Moreover, Andersen admitted it destroyed perhaps thousands of documents and electronic files related to the engagement, in accordance with “firm policy,” supposedly before the SEC issued a subpoena for them (Thomas, 2002).
The conceptual framework identifies the primary users of accounting information as investors, creditors, and those who advise them. It also assumes a “prudent” investor; that is, an investor who takes the time to become reasonably well informed with respect to accounting theory and practice. Discuss this concept with respect to the current economic environment. Are different groups of investors “prudent”? According to the conceptual framework, the potential users of financial statements are investors, creditors, suppliers, employees, customers, governments and agencies, and the general public (Financial Accounting Standards Board, 2006).
In Microsoft’s 2004 fiscal year, a 33% increase in net income resulted in a 1% increase in stock price. In the 2005 fiscal year, a 2% gain in net income resulted in a 4% decrease in stock price (Microsoft Inc 2006). As seen, an increase in net income does not automatically lead to an increase in stock price. For growth companies such as Microsoft, stock price is primarily driven by the growth of earnings (25 April 2007).
Dowd (2016) runs above and beyond with the clarification to state accounting fraud incorporates the change of accounting records in regards to sales, incomes, costs and different components for a profit motive, for example, boosting organization stock prices, getting ideal financing or maintaining a strategic distance from obligation commitments. Dowd is of the feeling that covetousness, absence of straightforwardness, poor administration data and poor accounting interior controls are a couple of explanations behind accounting fraud. (Dowd,
...hese events happen or minimize the negative impact when they happened. This will stabilize the distributable profit.
The Tyco accounting scandal is an ideal illustration of how individuals who hold key positions in an organization are able to manipulate accounting practices and financial reports for personal gain. The few key individuals involved in the Tyco Scandal (CEO Kozlowski and CFO Swartz), used a number of clever and unique tactics in order to accomplish what they did; including spring loading, manipulating their ‘key-employee loan’ program, and multiple ‘hush money’ payouts.
In the contemporary society, unethical and illegitimate activities within organisations are increasing, in order to remain competitive. Examples of violations are disrespectful behavior, non-compliance to company’s policies, unlawful conduct such as misuse of company’s fund and sharing of confidential information. In fact, all these activities cost a lot and organisations have to bear the consequences. Such consequences include tarnished reputation of the company, loss of trust among its stakeholders and unable to recruit the best talents in the industry. Studies have shown that many companies only realize the importance of ethical business practice after their wrongdoings are made known to the public. (Green 1997)