Earnings Management and Corporate Governance in Bangladesh (the Role of the Board and the Audit Committee)

Such an intense focus has been placed on quarterly earnings as an indication of a company’s success by everyone from analysts to executives that ethics have for the most part been thrown out the window, sacrificed to the all important number, i.e. earnings per share. This is the theory in Alex Berenson’s book “The Number: How the Drive for Quarterly Earnings Corrupted Wall Street and Corporate America.” This number has become part of a game to be played, a figure to be manipulated – beat the number and Wall Street all but throws a parade, miss it and a company’s stock may be abandoned. Take into account the incentives that executives have to beat the number and one can find plenty of reasons to manage earnings.

There are three kind of financial statements for companies which the content reflected different information. Among them, the first is the balance sheet, this statement reflects the financial situation of enterprises. For example, some of the listed companies wants to reflect good financial position in the statement, they will want to increase total assets, decrease accrued total liabilities, and then of course increase owners ' equity, making investors mistakenly believe the company has great investment value, thereby misleading public opinion and investors. Beside the balance sheet the other two financial statements are the income statement and cash flow statement. These two statements reflect the business situation of enterprises. The income statement is an important indicator to measure the performance of listed companies, it is closely related to the allotment and the profit. Therefore, in order to increase the profits of listed companies, they will have to Increase revenue, earnings, decrease expenses, costs and losses (Temte, 73). It helped increase tax evasion, embezzlement and other economic criminal activities. A large number of cases being investigated, all related to the accountants making the fake accounting entries. Therefore, the accounting credibility loss has restricted the development of the market economy. In a business, accountant often times handle the tax problem, so if

Prior to 2002, there was very little oversight of accounting procedures. Auditors were not always independent and corporate government procedures and disclosure provisions were inadequate. Sometimes, executive compensation was tied to the stock of the company which created an incentive to manipulate the stock price by using fraudulent accounting practices to make it look like companies were making more money than they actually were. The Sarbanes-Oxley Act of 2002 was introduced because of the collapse of several major corporations due to these practices. This paper will

The Sarbanes-Oxley Act has a direct effect on corporate governance, and it is the strengthening of audit committees at public companies. This audit committee members oversees the company’s the management accounting decisions and gain new responsibilities such as approving numerous audit and non-audit services, selecting and overseeing external auditors, and handling complaints regarding the management’s accounting practices (Blokhin, 2015). There has been increased attention to corporate governance resulted from the passage the Sarbanes-Oxley Act; therefore, this paper is going to address about three ways, management oversight, internal control, and ethical conduct, which are responsible for a company’s accounting information have been affected.

The article, "The Dangerous Morality of Managing Earnings" explores ethical concerns about the management of earnings. The article makes some generalizations about managers and the reporting of short term earnings. Among them are:

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?

This paper will reviews the extent to which corporate governance acts as efficient tool to protect investors against corporate fraud, thus contributing to summarize the literatures on role of corporate governance on preventing occurrence of corporate fraud. In a more recent study, corporate fraud is part of earnings manipulation done outside the law and standards. Whereas, the activities covered by the terms earnings management (such as income smoothing and big bath) and creative accounting (or window dressing) normally remain within the regulations. In this regard, corporate governance mechanism, particularly effective boards,

The goal of any publicly traded company is to make a profit. Many factors come contribute to the equation to achieve this goal. The most important factor is compliance with the Accounting governing bodies, such as GAAP (Generally Accepted Accounting Principles). As an accounting firm it is essential to review your financial statements for consistency regarding the accounting treatment of share-based payment and accounting

Introduction. The authors studied the earnings management and its manipulation techniques that executives use to obtain preferred financial results. The regulatory changes promoted an aggressive financial reporting. The pressure of mandatory reforms and financial markets affect CFO’s personal financial interests and interest of corporation that the management can manipulate with. The authors investigated the influence of incentive conflict and earnings management ethics on financial reporting (p. 506). The main objective of research is to comprehend the earnings management structure, earnings management ethics, and examine methods to minimize CFO’s harmful effects on earnings.

The author in the article “A board member’s guide to financial statement emphasizes the manner in which this information can assist board members to comprehend the accounting routine and the submission of the data in detail to its members via the treasurer. Observations made while being a guest at a board meeting appalled him at the approach the treasurer took to deliver the financial statement and at the board members who accepted the statement without querying the data.

Financial management has closed relation to corporate governance because the failure of corporate governance can lead to reporting failure whereby most of them manipulated their financial statements. In addition, the failure in corporate governance that is occurring in the organization will put a pressure to the company when it comes to report on the performance of the company. In order to show that the performance of the company is in line with the expectation, they tend to produce a false accounting, aggressive earnings management and other reporting failure where there is no existence of transparency, accountability and

What is earnings management? According to the author it is the process by which companies artificially inflate or deflate their revenues or earnings per share. Schipper defines it as the management team deliberately intervene in the external financial reporting process with the purpose of securing some kind of private gain, which means their actions were not taken with the shareholders in mind, to whom they owe fiduciary duties towards. Instead they were for their own private gain. Healy and Wahlen’s definition constitutes the same principal of altering the financial statements but it also proposes the two main objectives of earnings management firstly, to mislead stakeholders about the economic performance of the company; secondly, to influence contractual outcomes which depends on the accounting figure.

Among all the research papers, there are two main methods to calculate discretionary accruals: change dependent variables to accruals model (e.g., Jones Model, Modified Jones Model, and McNichols Model) and performance adjustment measure (Kothari, Leone, and Wasley, 2005). The most frequently cited model of discretionary accruals model is Jones (1991) Model. The estimation of the discretionary accruals was used as the measure of earnings management. Jones (1991) measured the total

A company prepares financial statement to provide information about its financial position and performance. This information is in turn used by a wide range of stakeholders (such as investors, banks, customers, suppliers etc) in making economic decisions with respect to respective economic interest in the company. Typically, in terms of ownership by investment in shares of the company, shareholders though own the company but do not manage it. Therefore, the shareholder and other such stakeholders to get comfort in taking sound decision need independent assurance from the auditors that the financial statements reflect true and fair view of the company affairs in all material respects. Hence, in order to enhance the level of

In the partial fulfillment of the requirement of Master of Business Administration (M.B.A.) Program (2002-2004) Hemchandracharya North Gujarat University, Patan.