Fraud Cases have Put Earnings Management back in the Spotlight

778 WordsFeb 4, 20183 Pages
immerman, 1990, Badertscher, 2011, Dechow, 1995, Healy and Wahlen, 1999). Although earnings management is not a new phenomenon, the emerging of the fraud cases such as Enron, Lehman Brothers, and other instances of financial fraud have again put this topic in the spotlight. Emerging concerns over earnings management have led to new disclosure requirements and the implementation of corporate good governance codes such as the Sarabanes Oxly Act (SOX), tabaksblat and other corporate good governance codes to reduce this phenomenon within firms. The role of financial reporting is to portray the economic position of a firm in a timely and credible manner. These financial statements should serve as a useful information source for different stakeholders in making economic decisions. For information to be useful it should be relevant and reliable (accounting book). Because the reported earnings could affect the decision making of stakeholders or contractual outcomes which are related to remuneration of managers or debt covenants, managers have strong incentives to adjust earnings to a desired pre-determined level (Watts, 1990) . Although established accounting standards limit the use of opportunism, the determinant is that managers have flexibility in choosing the accounting method, and the existing information asymmetry between them and external stakeholders allows them to prepare the financial reports to their own advantage. Information asymmetry is the information advantage

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