Oak Industries Case Sample Answers Essay

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

In this case, revenue cannot be recorded because all of the criteria is not met in regards to the return of the sale of goods. Even if it can be reasonable to assume that all six areas of this guideline was met, the ethicality behind the transaction remains; to falsify the earnings statement for the year ended 2010 in order to recognize higher earnings and maintain stock pricing, which goes along with the AICPA code of conduct regarding integrity. Section 54.02 states personal gain cannot override service to the public. Integrity cannot allow for deceit or subordinate of principle. (www.aicpa.org, sect. 54, Article III, Sept. 14, 2014)

This study investigates whether managers opportunistically round up the reported pro forma earnings and whether the rounding manipulation of pro forma earnings is more severe

Secondly, in order to figure out the relationship between fraud and earnings management, I find some definition of fraud. It is an intentional conduct and materially mislead financial statements, which also violate criminal and civil law.

The third issue involves a misrepresentation about an estimate that has an impact on the reported profit. In slightly different contexts dealing with budgeting situations, the studies mentioned earlier have shown that when a subordinate’s information is used as a basis for his performance evaluation, the subordinate has incentives to misrepresent information. This phenomenon is tested in Issue #3, which involves estimating the percentage of completion of ending work in process inventory in a process costing situation. By overestimating the degree of completion, a

The United States has become increasingly concerned with the quality of earnings reported from companies. Although the quality of earnings should be able to be used as a predictor to the future of the company, management policies have been able to find a way that makes the company seem as if incoming income is steady, even if it is not. Ways like over and understating stating expenses can make a company seem better than they are. While the use of non-GAAP earnings can have benefits, many individuals are worried that using non-GAAP earning will lead to giving out false financial reports. No matter the accounting method used, all managers must act ethically on behalf of the law, and the company.

Financial statement fraud occurs when financial statements are intentionally misstated in order to make an organization appear better off than it actually is. This not only includes misstatements but also information that is intentionally omitted or improperly stated. The two sub-categories of financial statement fraud are asset/revenue overstatements and understatements. Financial statement fraud is the least common type of fraud, occurring in 9% of the cases studied in 2014, but the most costly with a median loss of $1,000,000. (Report to the Nations,

This decision made by the manager to not fix a $1500 mistake made by the bank in Parry Company’s favor is unethical in my opinion as it will mess up more than one company’s records. Any manager of a company would want their records and bookkeeping to be as

The author used a qualitative and quantitative analysis in the research. The researcher analyzed issues of earnings management and financial statement manipulations. The findings demonstrated that qualitative misstatements affect the auditor readiness to provide a judgment. The auditor realizes the outcomes, such as disciplinary actions and litigation consequences. Auditors do not require companies to correct immaterial errors if they based on estimates and earning forecast (pp. 437-438). However, the American Institute of Certified Public Accountants (AICPA) made changes in professional auditing standards that require auditors to discuss errors to audit committee (p.

The auditor’s responsibility is to express an opinion on the fairness of the presentation of the financials, and an opinion on the effectiveness of internal control of financial reporting, including an opinion on whether management’s assessment of internal control is fairly stated.

The CEO and the company controller are faced with an ethical dilemma. Their bonuses are calculated based on the income from continuing operations. A conflict of interest exists. The decision of the executives is influenced by the possibility of personal gain. They personally profit from the decision to report the recall as an extraordinary item. Also, they might be misclassifying the recall expense transaction as extraordinary in order to improve the results of continuing operations.

Grahama, Harvey and Rajgopalc (2004) interviewed over 400 executives, revealing that executives assign a high level of priority in meeting target earnings as it builds credibility with the market and multiplies the positive effect, confirming previous research. The executives also believed failing to meet the targets would result in a severe market reaction and that directors sacrifice economic value to avoid these effects, avoiding a potentially larger economic loss. This can also be said of achieving or beating expectations, where the potential economic gain from the multiplied positive market effect can easily outweigh the economic sacrifice. Equipped with these justifications, over 80% of those surveyed admitted they were willing to sacrifice economic value and use RM to meet expectations. Moreover, the executives acknowledged that RM is more widespread and favoured to the manipulation of accounting methods,

Earnings Management: An Examination of Ethical Implications, Fraud, and the Related Impacts to Stakeholder Interests

4 a) Do you think situations like this (i.e., aggressive accounting or even financial statement

a. What steps has the external auditing profession taken to minimize potential bias toward important users and thereby encourage auditor independence?