Ethical Concerns in Corporate Finance: A Closer Look at Earnings Management

Ethical Concerns in Corporate Finance: A Closer Look at Earnings Management

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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...

... middle of paper ...

... 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.

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