Earnings Management Hw

1040 WordsApr 6, 20085 Pages
1. What is earnings management? The companies use earnings management as a strategy by which they can easily control and manipulate their earnings to reach their pre-determined earning target. 2. Why do companies employ earnings management techniques? Accountants cannot predict every business structure, every new and innovative transaction. Therefore, they build up principles that allow for flexibility so that they can adapt to changing circumstances. However, people make use of that flexibility. They employ earnings management techniques to shade financial unpredictability. Thus, the real results of the decisions of the management are veiled. 3. Describe 5 popular techniques used by companies that Levitt believes are illusions.…show more content…
Secondly, he suggests that the accounting profession should qualify what is acceptable or not for the auditors. Third, Levitt suggests SEC to focus more on the materiality problem and to search for the materiality frauds more because according to him materiality requires consideration of all relevant factors that could impact an investor's decision. Fourth, he said that SEC staff should consider interpretive accounting guidance on the do's and don'ts of revenue recognition for example by publishing standards like for the software industry to other service companies. Fifth, Levitt suggests the private sector to take action where current standards and guidance are inadequate. According to him, the FASB's projects, which are now in progress, will bring greater clarity to the definition of a liability. Sixth, he says that the SEC's review and enforcement teams will continue to root out and aggressively act on abuses of the financial reporting process. Lastly, he suggested the Public Oversight Board to form a group of all the major constituencies to review the way audits are performed and assess the impact of recent trends on the public interest. 5. What concerns does Levitt have with regard to the auditing process? What

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