Ethics in Earnings Management

A company’s ultimate goal is to make money and remain a going concern. With that goal in mind, management must continually report sustained or improved earnings to stakeholders to ensure constant and new investments in the company’s future (Geiger & van der Laan Smith, 2010). The pressure to report positive results can lead management to engage in earnings management activities to alter short-term results to meet the goals set forth (Geiger & van der Laan Smith, 2010). In addition to the pressures on company management, broad accounting principles introduce ethical issues into the accounting profession (Gibson, 2011). Merchant and Rockness (1994) suggested the practice of earnings management introduces “the most important ethical issues facing the accounting profession” (p. 79) while Rosenzweig and Fischer (1994) noted it to be “a significant ethical concern” (para. 18).

The following is presented in response to the case “The Dangerous Morality of Managing Earnings,” as cited in Gibson (2011). The case dealt with the ethicality of managing earnings through management’s manipulation of factors that can have an effect on company resources and financial statements. It detailed a survey of more than 600 respondents which included general managers, financial managers, and others. An analysis of the survey results suggests the question of whether the management of earnings is ethical in the eyes of industry managers is not as clear cut as one might expect.

The remainder of this paper will address the findings of a study outlined in the noted case. It includes a discussion of the restrictions placed on the accounting profession and whether these restrictions eliminate any ethical concerns. This is followed by an examination of h...

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...n der Laan Smith, J. (2010). The effect of institutional and cultural factors on the perceptions of earnings management. Journal of International Accounting Research, 9(2), 21-43. http://dx.doi.org/10.2308/jiar.2010.9.2.21

Gibson, C. H. (2011). Financial reporting & analysis: Using financial accounting information. (12th ed.). Mason, OH: South-Western Cengage Learning.

Merchant, K. A., & Rockness, J. (1994). The ethics of managing earnings: An empirical investigation. Journal of Accounting and Public Policy, 13(1), 79-94. http://dx.doi.org /10.1016/0278-4254(94)90013-2

Rosenzweig, K., & Fischer, M. (1994). Is managing earnings ethically acceptable? Strategic Finance, 75(9), 31. Retrieved from http://eds.a.ebscohost.com.proxy1.ncu.edu/eds/detail ?sid=813af1e2-ecd1-4735-bde4-ae919faf4d13%40sessionmgr4001&vid=1&hid=4208 &bdata=JnNpdGU9ZWRzLWxpdmU%3d#db=ofs&AN=510108019