Satyam Case

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

Raju. This is because liabilities represent a company's financial obligations, so he tempted to downplay them. In 30 September 2008, Satyam’s balance sheet shown that he understated liability of Rs. 1,230 crore. Next, nearly every quarter over the course of several years, Mr. Raju will overstated income in order to meet analyst expectations. The announcement shown that overstated quarterly revenues by 75 percent and profits by 97 percent on 17 October

The most important role of financial reports is to effectively communicate financial information to outsiders in a timely and credible manner (FASB, 1984). Earnings are vital in financial statements because earnings represent the company’s value. Investors and creditors always look to

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.

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

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.

Several main reasons for the occurrence of earnings management include influencing the stock market, growing management compensation, decreasing the possibility of violating lending agreements, and averting government intervention. It is believed that managers might attempt to manage earnings because they believe reported earnings impact investor and creditor decisions. In most cases, earnings management techniques are designed to improve reported income effects and to lower the company’s capital cost. However, in order to increase future profits, management might take the chance to report more bad news in low performance

Ramalinga Raju, then CEO of Satyam, intentionally mis-stated the financial statements of the company. His actions caused the firm’s shareholders to lose billions of dollars. According to his resignation letter, it started as a marginal gap between the actual operation profit and the reported profits. However, the gap grew to unimaginable proportions as the company’s operation grew and they could not justify their financial records.

But according to the history of Scrushy, him belonging from a poor background and struggling his way to work up the pharmaceutical company and being approached to startup his business with 1 million, the expectations to meet the investors requirements served as a high stress factor on the CEO himself and according to Weld et.al, (2004, p.44), the fraud took place in a period where the economic growth of a company lacked regulations, which made it easier to get away with things. In reference to Weil (2004, p.45), the leaders in the 1990s were more focused on revenue than profitability. Growth was considered the key for a company. In order to fulfill the whole dilemma, such conditions pressured Scrushy to continue to increase the company’s growth by meeting the expectations of the

This research conducted on the investigation of a world wide known company WorldCom, a company that had stolen billions in dollars from investors, competitors, and employees financial, to help live the senior managers lives more luxurious. This research paper will go more in depth to why the CEO Bernard Ebbers and the CFO Scott Sullivan committed financial statement fraud to benefit themselves. This will tell us behind the scenes of the investigation conducted against WorldCom and the consequences suffered to those who committed and helped with the fraud and how to this day WorldCom is still successful.

The negative profit projections could have triggered a pressure situation for the executives, thus Koornhof and Du Plessis (2000) identified that an increasing financial pressure on a company’s management to report favourable results on a constant basis is the main reason for deliberately misstating financial statements. Furthermore, companies which are facing financial distress are more likely to commit fraud (Albrecht et al., 2012, p. 147).

Roychowdhury (2006) derived normal levels of cash flow from operations, discretionary expenses and production costs; then tested the effect of sales manipulation, discretionary expenditures and overproduction on the abnormal of the previous three variables. His research found that directors use the various RM activities to manipulate earnings, however it is unclear just how much can be attributed to the purpose of meeting expectations, and how much is to simply control expenses during times of difficulty.

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

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.

Nowadays, as our economy is facing possible everyday crises, managers undergo an increasing pressure in order to keep their company 's earnings stable. Shareholders and analysts expect companies to meet forecasted goals and not to deviate from these. Especially, reliable companies are to report positive results and shall not present any 'surprises '. Managers therefore often turn to their accounting departments for help, whose job it then is to improve the bottom line by changing the information shown in financial