Earning Management: Is It Good or Not?

1167 WordsMay 30, 20135 Pages
Earning management is good or not? Introdcution This essay is to examine whether earning management is it good or bad. Though there is so many debate about whether it should be accepted to be good rather than bad, however, this essay will explain the both side of earnings management. Earnings management reduces the quality of financial reporting, it can interfere with the resource allocation in the economy and can bring adverse consequences to the financial market. This essay analyses both, causes and motives of earnings management as well as possible remedies. Therefore, it is not surprising that market participants, legislators, regulators, and academics are concerned with the need to control financial reporting abuses. The…show more content…
Therefore, it is reasonable to assume that earnings restatement firms can be characterized as firms who knowingly and intentionally engaged in earnings manipulation. Financial Reporting Perspective Based on Hanna (1999) article in CA magazine review, important point to get across from this article is that management is tempted to provide excessive unusual, non-recurring and extraordinary charges, to put future earnings in the bank. Furthermore, these future earnings are buried in operations. This makes it difficult for investors to diagnose the reasons for subsequent earnings increases. Investors and analysts look to core earnings, ignoring extraordinary and non-recurring items Implies manager not penalized for non-core charges, such as write-downs, provisions for restructuring. But current non-core charges increase core earnings in future years, through lower amortization and absorption of future costs. As a result, managers tempted to ―overdose on non-core charges, thereby putting earnings ―in the bank also called cookie jar accounting. Conclusions The concept of the earnings management is difficult to define and very subjective to decide. I believe that earnings management not only due to violation of GAAP but also aggressively choose GAAP method that are considered as earnings management. This broad definition may discourage earnings management and benefit

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