Internal And External Stakeholders : Financial Statements

2118 Words9 Pages
Both internal and external stakeholders use the numbers that issuers report on the financial statements, in order to understand how that company is doing financially and project the company’s future earnings and health. The reasons discussed as to why financial statement issuers may manipulate reported earnings are in order to meet internal targets, external expectations, provide income smoothing, and provide window dressing for an initial public offering (IPO) or a loan. Internal Targets Internal earnings targets may include the budgeted numbers set by management or the required numbers needed for an individual to receive a bonus. In regards to budgeted numbers, if these numbers are not met it will be reflected unfavorably upon the individuals involved, department, and company as a whole. Likewise, with required numbers, if not met the individual responsible will not receive their bonus. Internal earnings targets represent an important tool used to motivate managers into increasing sales efforts, control costs, and use resources more efficiently. The individual under evaluation will have a tendency to forget the economic factors underlying the measurement and instead focus on the measured numbers. Research has confirmed that the existence of earnings based internal bonuses contributes to the incidence of earnings management. Managers subject to an earnings based bonus plan are more likely to manage earnings upward if they are close to the bonus threshold and are more
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