Financial Companies And Its Impact On The Business World

1181 Words Oct 26th, 2015 5 Pages
Course Project
Whitney Tilson, a noted analyst, warns investors in an article in The Motley Fool that more than any other type of company, financial companies have immense discretion regarding what earnings to report. The key is the rate of loan losses that they expect to experience, which must be estimated at the end of every period. By changing this estimate, which in turn changes one of the largest expenses on their income statement, financial companies can manage net income. Tilson specifically cites Farmer Mac, the agency created by the federal government to provide funds in the agricultural lending market, which many analysts believe smooths its earnings across time by simply changing its estimate on loss rates.
Managing income numbers is not a new concept in the business world. As early as the 1930s, firms routinely would write-up (or down) long-lived assets to accommodate the amortization necessary to realize some target income (Bitner, & Dolan, 1998). More recently, some corporations have tried to inhibit practices of manipulation by instituting a code of ethics. Even though these codes are created in the attempt to eliminate the unclear sections in the ethics of earnings management, there are still complexities where income figures can still be manipulated. Smoothing behavior is seldom recognized or admitted by firms, but the practice is perhaps more prevalent than professional standards indicate. In effect, income smoothing restructures and redistributes income…
Open Document