For many years, the ethics of finance has been a concern in the corporate world. With the flexible accounting standards under the Generally Accepted Accounting Principles (GAAP) and International Accounting Standards (IAS), there are many grey areas of what is, and is not, ethical. Earnings management falls in this grey area.
Earnings management is the term used to describe the process of manipulating earnings of the firm to achieve a target predetermined by management. The flexibility of accounting standards may cause some variability in earnings to occur as a result of the accounting choices made by management. However, earnings management that falls outside the generally accepted accounting choice boundaries is clearly unethical. The intent behind the earnings management also contributes to the questionable ethics of the practice. Some managers use earnings management as a means of deceiving shareholders or other stakeholders of the organization such as creating the appearance of higher earnings to increase compensation or to avoid default on a debt covenant (Kavousy 456). The intent to use earnings management to deceive stakeholders suggests that it can be unethical, even if the earnings management remains within the boundaries of GAAP or IAS.
Everyone has there own definition of earnings management, and therefore, there is no standard definition. It has been defined as management's exploitation of accounting flexibility to meet earnings expectations of shareholders. It has also been defined as the misuse of discretionary judgment in financial reporting and in the way transactions are structured to either mislead stakeholders or to influence the outcome of negotiations such as contracts with third parties (Elias 34). Anot...
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... behavior. The problem with these rationalizations can lead to increasingly expansive earnings management activities that ultimately lead to a restatement of income, and harm to the shareholders.
Works Cited
Darwall, Stephen. Consequentialism. Malden MA: Wiley-Blackwell, 2003.
Elias, Rafik. "Determinants of Earnings Management Ethics Among Accountants." Journal of Business Ethics, 40.1 (September 2002): 33-45.
Kavousy, Esmaeil, Hamid Fard, Saeed Kangarlui and Anvar Bayazidi. "The Relationship Between Earnings Management and Ethics Criteria in Accepted Companies in the Teheran Stock Exchange." European Journal of Social Sciences, 14.3 (2010): 455-463.
Malachowski, Alan. Case Studies in Business Ethics. New York: Routledge, 2001.
Ronan, Joshua and Varda Yaari. Earnings Management: Emerging Insights in Theory, Practice and Research. New York: Springer, 2008.
Ethics plays a vital role in developing accurate and high quality financial statements for management, financial institutions, and investors. As management utilizes financial statements to make decisions regarding the operations of the business, it is necessary to review accurate financial statements to make strategic decisions about the future of the organization. Investors and financial institutions require accurate financial statements to make informed decisions upon whether to invest funds into the organization or the wisdom of lending funds to said organization.
Throughout the past several years major corporate scandals have rocked the economy and hurt investor confidence. The largest bankruptcies in history have resulted from greedy executives that “cook the books” to gain the numbers they want. These scandals typically involve complex methods for misusing or misdirecting funds, overstating revenues, understating expenses, overstating the value of assets or underreporting of liabilities, sometimes with the cooperation of officials in other corporations (Medura 1-3). In response to the increasing number of scandals the US government amended the Sarbanes Oxley act of 2002 to mitigate these problems. Sarbanes Oxley has extensive regulations that hold the CEO and top executives responsible for the numbers they report but problems still occur. To ensure proper accounting standards have been used Sarbanes Oxley also requires that public companies be audited by accounting firms (Livingstone). The problem is that the accounting firms are also public companies that also have to look after their bottom line while still remaining objective with the corporations they audit. When an accounting firm is hired the company that hired them has the power in the relationship. When the company has the power they can bully the firm into doing what they tell them to do. The accounting firm then loses its objectivity and independence making their job ineffective and not accomplishing their goal of honest accounting (Gerard). Their have been 379 convictions of fraud to date, and 3 to 6 new cases opening per month. The problem has clearly not been solved (Ulinski).
Turner, Robert M. "Ethics and Professionalism: The CPA in Industry." The CPA Journal (1999). Retrieved on 18 September 2006 .
...urvey of ethical behavior in the accounting profession. Journal of Accounting Research, 9 (2), pp. 287-306.
... 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.
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