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

When analysts question a firm’s earnings quality, it raises concerns regarding under or over aggressive accounting practices that may be allowing the firm to manipulate the earnings. Earnings quality is defined as the strength of the current earnings in being used to predict future earnings and cash flows. Since earning quality is indicative of future performance, analysts are more likely to address issues that have substantial impact on the earnings quality. An issue arises when the nature of the earnings is questioned. While permanent earnings are part of normal operations, any irregular, one time earnings can skew the earnings, making the firm look more profitable than it is. This is due to the inability to recreate similar one-time transactions that will give rise to such numbers. Investors prefer predictable

Understandably, there are a variety of ways in which a company can manage their earnings, and if accomplished successfully, the results can be highly profitable. Not all techniques are fraudulent, as effective earnings management is considered good for business and shareholders. Income smoothing is a specific example of permissible earnings management that involves controlling fluctuations in net income to make earnings less variable over a given period of time (Goel & Thakor, 2003). Smoothing is acceptable as long as it adheres to the restrictions of U.S. GAAP, which maintains that all revenues and expenses are accounted for in a defined fashion. There are a lot of incentives in figuring how to effectively smooth income, as substantial value can be created through the successful arrangement of financial transactions. Management is able to make more intelligent decisions with regards to the future of the firm if the earnings are able to match the forecasts. One instance this is seen is when management is faced with the decision to smooth total income or

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.

In this research paper the authors want to express their thoughts by stating that how to them earnings reporting pertains to the discovery of information that has not been disclosed by either people or other types of sources and focus towards the negative in this study. In my opinion, the title of the paper itself could have had a different title only because throughout the paper it analyzes negative or bad news rather than really paying attention to both perspectives. Also the paper captures the information or news that occurs by using a three day window in which Quarterly Earnings Announcement (QEA) take place and compares it to a period where it does not take place. Furthermore, in this paper there are three hypotheses that arise

This report is written as a response to the monograph in which the ICAEW published on how financial accounting disclosures can be improved. The aim of this report is to critically discuss and evaluate the worthwhileness of the recommendations made from a financial investor’s perspective. It is done by reviewing recommendations put forward by the ICAEW and analysing if each of the disclosure recommended is worth the effort while putting in perspective what effects these recommendations have on professional investors who are one of the primary users and consumers of financial statements. The report contains information mainly from the ICAEW report and the CFA institute report

0). According to Chinniah, there has been a lot more financial statement fraud cases due to the pressures placed on managers by the shareholders, increasing competition among other companies, the significance of meeting analyst forecast for net income, and the increasing public expectations of that specific company to perform above industry standards (p. 0). Companies with the expectations of having higher standards are finding themselves facing legal and economic consequences for committing immoral and illegal activities (p. 0). Furthermore, Chinniah discusses the two principle categories of behavior committed by the employees who prepare the financial statements: macro-manipulation and micro-manipulation (p. 1). Both the macro and micro manipulation occur when the financial statement preparers are only interested in benefiting themselves (p. 1).

This case study is the first of a two-part Earnings Management Case. The purpose of Part

Prior to the legislation of Sarbanes-Oxley Act, the regulations of financial statement were much more lax than current. There were only the rules declared by the SEC, the 1933 and 1934 securities laws (Carol, J., 2005). These laws required public companies to disclose the corporate information and have an independent party who reviewed and assured the company’s financial report. The public trusted the financial reports which were audited by the auditors and used in making investment decision. However, no one gave precedence to the accuracy and transparency of the financial information. Hence, many companies’ management took advantage of the lax reporting rules by manipulating the financial statement to make financial

Excello Telecommunications has a history of excellent performance but with a surge in oversea competitors the company may not be able to meet its financial estimates for the first time. Executives were worried that not being able to meet the financial estimates could impact stock options, bonuses, and the share price of company stock.

In the accounting field there is always a question whether it’s alright to retain paid in capital and separate it from earn capital. Accountants today have to be really be careful especially with the fact that so many accounting laws are changing in the United States. In this paper I will be explaining why it is important to keep paid-in capital and earned capital separate. I will also be explaining whether paid-in capital is more important that earned capital, or vice-versa. Following that, I will compare basic earnings per-share against diluted earnings per-share and which is more important to investors.

As stated in Exhibit 3, Earnings management is the managerial use of discretion to influence reported earnings. Within the accrual accounting system, managers have significant discretion with their firms’ accounting choices. Management has the ability to make choices that can opportunistically lead to higher or lower reported earnings. Richard 's and Ira Zar’s (CFO) actions would not change if these results were the result of GAAP flexibility because he violated the rules of accounting, the conceptual framework principle of neutrality in numerous ways to report the financial results that CA did under false pretenses. It would be one thing if CA garnered these results through legitimate business decisions versus using accounting tactics like changes in accounting estimates or outright fraud as in the use of the 35 day Month. The purpose of which was solely to allow CA to meet or exceed analysts’ estimates.

Both Burgstahler and Dichev (1997) and Degeorge et al. (1999) explain threshold-driven earnings management behavior by referring to the prospect theory (Kahneman and Tversky 1979), which suggests that for a given increase in wealth, the corresponding increase in value is the greatest when the increase in wealth moves from negative to positive territory relative to a reference point (viz., zero earnings, zero change in earnings or zero forecast error). While they do not specifically explain the formulation of reference points or the usage of other reference points beyond those extensively investigated three earnings thresholds, they imply the existence of other reference points (Burgstahler and Dichev 1997), ). and They also suggest that if other reference points are used either by corporate boards or investors, and if those reference points are reflected in the executives’ reward schedulesor compensation contracts, executives

2.1. At the end of each year when financial statements are verified by the auditors, the company management is facing the dilemma: what to do with the profit? The dilemma is related with the question whether to please shareholders by giving them large dividends or to keep the money in the company for investment purposes. This decision however does lie exclusively in the hands of the company management. If they decide large dividends, then the funds needed for investments and growth will be reduced significantly. This may jeopardize the company’s competitive position – without investments, the company’s future is always at stake.

Earnings management (EM) refers to the act of affecting how outcomes of business activities are presented, by altering between different accounting policies, redistribution of discretionary earnings and expenses and manipulating real business activities without exceeding Generally Accepted Accounting Principles (GAAP) (Walker, 2013). In recent years, EM has become a much more prevalent topic for discussion as an increasing number of firms use the technique to achieve management targets and therefore maximise shareholder wealth. Over-performing EM usually results in fraud.

There are different incentives to managements of firms to practice the phenomenon of earnings management. Most of these incentives are related to benchmarks of earnings. Sometimes, the previous period's performance may be the benchmark to the firm. In other cases, the benchmark to the firm may be the expectations of financial analysts. The promised compensations to the firm's management may be the most important incentive of the practice of earnings management. Benchmarks are necessary for the determination whether the management deserves or does not deserve the promised compensation.