Earnings Management

According to an article posted in “The CPA Journal” by Michael D. Akers, Don E. Giacomino, and Jodi L. Bellovary, earnings management is defined as;

“Earnings management is recognized as attempts by management to influence or manipulate reported earnings by using specific accounting methods (or changing methods), recognizing one-time non-recurring items, deferring or accelerating expense or revenue transactions, or using other methods designed to influence short-term earnings.”

This definition tries to explain that managers have the control to influence the earnings and report them in a way that works in their favor. They do this using the accounting methods, therefore methods allowed by GAAP and find loopholes that are benefitting to them. This same article talks about a survey that was complete by William J. Bruns, Jr., and Kenneth A. Merchant and the conclusions of their survey was then submitted to the Harvard Business Review. Asking readers to rate the acceptability of management practices of 13 earnings management situations. The results as described in the article were “Frightening”. Following observations were made;

“It seems that if a practice is not explicitly prohibited or is only a slight deviation from rules, it is an ethical practice regardless of who might be affected either by the practice or the information that flows from it. This means that anyone who uses information on short-term earnings is vulnerable to misinterpretation, manipulation, or deliberate deception.

We have no doubt that short-term earnings are being managed in many, if not all companies. Some of these earnings-management practices can be properly labeled as immoral and unethical.”

According to this survey, short-term earnings results in misrep...

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...ond, James Jiambalvo, KR Subramanyam. "The Effect of Audit Quality on Earnings Management*." Contemporary accounting research (1998): 1-24.

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Michael D. Akers, Don E. Giacomino, and Jodi L. Bellovary. "Earnings Management and Its Implications." Educating the Accounting Profession (2007): 1.

Patricia M. Dechow, Richard G. Sloan and Amy P. Sweeney. "Detecting Earnings Management." Patricia M. Dechow, Richard G. Sloan and Amy P. Sweeney. The Accounting Review. American Accounting Association, 1995. 193-225.

Stephen D. Makar, Ph.D., CPA, Ph.D., CPA Pervaiz Alam and D.B.A., CFE, CPA, CMA and Michael A. Pearson. "When does Juggling the Numbers Become Fraud?" Earnings Management (2000): 1.