Earnings Management

3502 Words Sep 19th, 2007 15 Pages
Is earnings management good or bad? Who (or which part of corporate governance mechanisms) is responsible to constrain earnings management? To what extent can the auditor constrain earnings management? Propose some methods for the auditors to detect and constrain earnings management. Does market react to firm's earnings management behavior?

In order to discuss earnings management and what its affects are on business and whether or not it's a good thing, one must first understand what earnings management really is. Earnings management is often referred to as creative accounting or income smoothing. By definition, earnings management is "strategies used by the management of a company to deliberately manipulate the company's earnings so
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Lastly, company participates in good earnings management is because it provides a way to present information to its present and potential investors about their operations. Actions such as these that achieve stable and predictable results and positive earnings trends through good planning and operational responsiveness are not illegal or unethical in any way, its just part of business. All businesses try to reach their targets and try to continue seeing growth while responding to their competition and changes in the market. Good earnings management just allows the company to continue their operations with some type of goal to achieve or target to reach. This only becomes a bad thing when those goals or targets are not reached and someone starts making up the numbers. Overall, only improper or abusive earnings management is a bad technique. Managers and companies should focus on the long-term value creation that benefits investors over the short-term earnings management that satisfies financial analysts. Quarterly or periodically managing earnings is a bad idea for many reasons. First, quarterly predictions narrowed down to a couple of cents per share don't say much about the company's long-term prospects or ability to generate profits. Second, as mentioned above, it's illegal to abusively manage earnings and if the company does get caught for doing so, the actions of the company end up costing the

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