Earnings Management Essay

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Introduction Financial statements provide useful information to a wide range of users. These users include shareholders, owners, investors, suppliers, managers, government and creditors etc. Many users rely on the information from financial statements to make decisions. Therefore, financial statements should be relevant, provide faithful representation, comparability, verifiability, timeliness and understandability. However, there are different evidences of managers manipulating the earnings for various reasons. “Earnings management is the choice by a manager of accounting policies, or real actions, affecting earnings so as to achieve some specific reported earnings objective” (Scott, 2012, p. 423). Managers play an important role in…show more content…
The studies of Paul M. Healy (1985) indicated incomes and accounting polices changes strongly associated with the mangers’ bonus contracts from two types of tests, accrual tests and tests of changes in accounting policies. Healy (1985) conclude “Managers are more likely to choose income-decreasing accruals when their bonus plan upper or lower bounds are binding, and income-increasing accruals when these bounds are not binding” (p. 106). Therefore, managers would have the motive to manipulate the earnings. Avoid getting fired is another reason that managers participate in earnings management. Majority of the managers are evaluate based on the company’s performance. If the company’s performance does not meet the investors or shareholders’ expectations, the manager could potentially get fired. Managers would have the motivation to make sure the net income meet with the expectations. Corporates Motives Managers engage in earnings management for corporate interests. Corporations have strong interests to meet the investors’ expectations as managers. Scott (2012) mentioned failure to investors’ earnings expectations has direct impact on the companies (p. 435). It will affect the firm’s share value, and investors might not invest the firm due to the earnings does not meet the expectation. Meeting investors’ earnings expectation is a great motive of earnings management. When a

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