Accounting Theory

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Assignment Task The four largest Australian Banks have faced considerable pressure from the community and the government in recent times. This pressure has arisen due to their interest rate increases in association with their high reported earnings. As accountants, we are responsible for preparing financial statements and “calculating” the profit figures. In your opinion, do you think the big banks are managing their reported earnings to show lesser profits than what they are actually earning (i.e. using earnings management techniques)? You are required, and must, read and incorporate academic journal articles and other relevant materials to justify your viewpoint. INTRODUCTION Accounting can be broadly defined as the…show more content…
In order to do so, it is necessary to understand and define earnings Management. Definition of Earnings Management Healy and Wahlen (1999) define earnings management as: “Earnings management occurs when managers use judgement in financial reporting and in structuring transactions to alter financial reports to either mislead some stakeholders about the underlying economic performance of the company or to influence contractual outcomes that depend on reported accounting numbers.” Another definition is given by Fields et al. (2001) who state that: “Earnings management occurs when managers exercise their discretion over accounting numbers with or without restrictions. Such discretion can be either firm value maximizing or opportunistic”. The above definitions highlight the point that ‘managerial intent’ is a criterion for earnings management (Spohr 2005). Several academic literatures seek to point out the activities which can be considered to be earnings management. However, as the definition of earnings management does not rely on any one item of the income statement, it does not need to be directly connected to reported earnings. Its impact is through accounting numbers and may also be directed at financial ratios as opposed to earnings (Schipper 1989). Dechow and Skinner (2000) have classified earnings management as follows: Reporting Type Accounting choices Within GAAP Conservative Accounting - Overly aggressive recognition of provisions or reserves -
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