Earnings Management, in Exchange Listed Companies, Is Not Fraud but a Case of Caveat Emptor for Investors

2071 WordsApr 18, 20129 Pages
INTERNATIONAL UNIVERSITY COLLEGE Sofia “Earnings management, in exchange listed companies, is not fraud but a case of caveat emptor for investors” Coursework in BUSINESS FINANCIAL CRIME Student registration No: 479866 Program: International Finance and Trade, Level 2 Lecturer: A. Paparizov “Earnings management, in exchange listed companies, is not fraud but a case of caveat emptor for investors” With the development of the stock markets and the huge grow in the volume of money traded in them, over the past 20 years a rising attention has been aimed at towards the importance of truthful and fair accounting. The real interest in how companies chase their financial reporting has developed in the wake of a multitude of large…show more content…
We already mentioned that earning management happens in the world and is very common practice nowadays, not only in big worldwide corporations, but also in not so big national companies looking for high accounting numbers, that will help them reach additional bank loans easily. But, is the earning management policy practiced by the firms, affects the stock prices and investors decisions. The investment or in other words “speculation” decisions most of the times depend on expectations of the future movement of the specific stock. In other words, the majority of non professional investors or speculators decide to buy or sell a certain stock on basis on their expectation rather than what is stated in most of books, “what they are ready to pay for it, based on their “sophisticated” analysis”. For example, if investors see that a company X has reported a 20% growth this year, or became number one in a specific sector, then the investors presentiment became bullish, creating a good environment for a significant growth due to speculators expectation. For example let us take the case of Enron – one of the biggest US companies in early 2000’s. Enron was leading company in electricity, communication, pulp, paper and natural gas sphere. In 2000 Enron Corporation reported nearly $101 billion. According to BBC site, “ it was the first to realize energy and water could be

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