The Following Essay Plan Sets Out The Framework Of Our Final Essay

This essay was originally written in February of 1996 for a composition class that I took at a local community college while completing my third and final year of high school. The original text has been edited to correct spelling and grammar. In truth, this essay is more of a collaboration between Betsy and I. She had take the class from the same instructor the year before. Many of the concepts discussed are largely extrapolations and enhancements of ideas she expressed. She got a B+ on her version; I got an A on mine :).

Such an intense focus has been placed on quarterly earnings as an indication of a company’s success by everyone from analysts to executives that ethics have for the most part been thrown out the window, sacrificed to the all important number, i.e. earnings per share. This is the theory in Alex Berenson’s book “The Number: How the Drive for Quarterly Earnings Corrupted Wall Street and Corporate America.” This number has become part of a game to be played, a figure to be manipulated – beat the number and Wall Street all but throws a parade, miss it and a company’s stock may be abandoned. Take into account the incentives that executives have to beat the number and one can find plenty of reasons to manage earnings.

There are a number of areas on the earnings statement that provide management with opportunities for influencing the outcome of reported earnings.

In this research paper the authors want to express their thoughts by stating that how to them earnings reporting pertains to the discovery of information that has not been disclosed by either people or other types of sources and focus towards the negative in this study. In my opinion, the title of the paper itself could have had a different title only because throughout the paper it analyzes negative or bad news rather than really paying attention to both perspectives. Also the paper captures the information or news that occurs by using a three day window in which Quarterly Earnings Announcement (QEA) take place and compares it to a period where it does not take place. Furthermore, in this paper there are three hypotheses that arise

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

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.

The primary goal of a firm is to maximize profits. This implies, of course, that each decision a manager makes is consistent with that goal. Although managers are expected to rely on internally-produced reports, such as balance sheets and income statements, to help them make decisions, most of the information that appears on these statements is period-based rather than decision-based. A balance sheet shows the sum total of a firm’s assets and liabilities at a given point in time. If the firm sold off all of its assets at book value and used the proceeds to pay its liabilities, what remains is owner’s equity: the amount that is owed to shareholders. An income statement is the difference

* With a focus on net income, managers could be incentivized to maximize ROE at the expense of other stakeholders, particularly bondholders. For instance, managers may fuel earnings growth by over-levering the company to benefit from tax shields in order to increase the value spread.  In addition, there are many other ways in which managers can manipulate earnings, for example, by slowing down depreciation charges or selling off assets to realize extraordinary gains.

Earnings management is considered to be a thorny issue in recent times. Issues relating to earnings management and corporate governance failure have prompted nations to legislate in order to curb this act. For example, Sarbanes Oxley Act of 2002 in the US and the UK revised combined code, 2008 and most recently, UK Corporate Governance Code of 2010. It is considered to be in the increase and believed to have significantly contributed to several corporate failures that triggered the 2007/2008 financial crisis with its debilitating effect throughout the whole world. Earnings management occurs when managers maneuver around accepted accounting rules to manipulate the accounting results in order to reflect particular desired accounting results.

There are several acceptable ways of earning management which managers can use in smoothing their accounts though such can be very complex and confusing. However, the major aim of earning management is to facilitate the organization to achieve a pre-set target, which is more often than not the analysts ' consensus. The most successful and widely acceptable earning management techniques assume twelve categories. However, both are bound some common underlying concepts, GAAP requirements, the actual company cases that outline its accounting applications as well as the real numerical illustrations of the company. However, some of the most common earnings management techniques include cookie jar reserve techniques. This is a normal concept of GAAP anchored accrual accounting under which the company management must estimate as well as record all the obligations which have to be paid in future due to events or transactions in Each financial year. However, under this concept, since the future events may not be known for sure, during the time of estimation, the method provides a substantial uncertainty over the estimation process. This leads to a situation of a

This essay evaluates the development of the EMU; a system that only came into effect three years ago. Through the lack of recent literature most of the evidence are derived from articles of various sources.

In addition, these expectations pose pressure on the management to find ways which may result in better presentation of the financial statements and improved earnings (Boot and Thakor 1991). The Banking sector in particular and other sectors in general are mostly seen following this approach. As for instance, there has been observed a trend of investing in such portfolios and instruments which are regarded as high risk investments. But the intention behind this is to improve or strictly stating ‘inflate’ the earnings of an enterprise without having regard to the riskiness of such investment decisions and the fact that the stakeholders of the business need justification of such improvements in the performance in the form of financial statements disclosures. For the purposes of obtaining security on the risky investments, corporations tend to enter into complex third party arrangements which cannot be disclosed in the financial statements. Apart from this, one other motivating factor which is regarded as the major reason behind this approach of management is that they have their own interests and objectives. As for instance, managers are better off in their performance appraisals when the company is showing profits consistently (Boone and Raman 2001).

The purpose of accounting is to consolidate and process a wide range of financial information to convey the financial health of the company mainly to the owners and potential investors. However, for years, large listed UK firms have been using earnings management to manipulate their earnings in order to meet the pre-determined forecasts for a variety of reasons. Here, it is essential to consider the earnings game. As Walkers (2013) suggests, the earnings game is to do with the directors negotiating with analysts in order to ensure they issue reasonable forecasts so that these can easily be achieved. It is when firms notice that they might struggle to meet these forecasts when they use the principle of earnings management. This practice is going against the initial objective of helping business managers’ reach a decision on the most optimal way of running the business. Instead, these managers are falsifying financial numbers in order to receive incentives. One of the incentives includes receiving bonuses when the company’s performance reaches a specified target. The aim of the essay therefore is to explore the extent to which large listed UK firms manage earnings to meet City earnings expectations, the various techniques used by firms, and whether or not investors should worry about firms employing earnings management to inflate financial figures.

Hence, the negative impacts of earnings management and accusing earnings management as one of the main reason of last decade financial scandals have forced accounting setters and financial regulators to provide solutions and initiatives for hindering earnings management. However, most of the attempts have failed, since earnings managements researchers found that managers still can achieve their earnings management objectives, through manipulating real activities. So it is more useful to examine the relationship between accounting responsibility in real earnings management. ????

Earnings management is a strategy used by companies to manipulate earnings to meet a pre-determined target. According to managers’ power approach, Bebchuk and Fried (2003), the greater the manager’s power, the greater is their ability to extract rent. The word “rent” is used to illustrate money or an incentive for service. Managers give their services for an exchange of monetary gain. In the last decade or so, we have seen many brutal financial losses due to company’s well orchestrated financial reporting strategies. West Management scandal in 1998, Enron scandal in 2001, WorldCom and Tyco scandal in 2002, Lehman Brothers scandal in 2008 and many more just shook the financial market to an unspeakable devastation.