The Practices Of Earnings Management

Decent Essays

From my point of view, I believe that the different practices of earnings management are misleading to the stakeholders, and it aims at increasing or decreasing the reported earnings based on the executive decisions and what would serve their position in the market.
This drives us to ask who the users of the company’s financial statements are. Those are the parties that rely on financial statements for decision making. And they are summarized in the following groups: Employees, Customers, Supplies, Creditors, Shareholders, Financial analysts, Stock underwriters and Regulators.
Why earnings management may occur
We have to views that justify why earnings management may occur. The first view states that the managers who carry out the earnings …show more content…

Yet, if something is legal (since GAAP permits many accounting choices) and is profitable for the company, then some people might assume it is ethical. While on the other hand, I believe that when carrying out a business decision it should be taken into considerations all its ethical aspects in addition to its profitability and legibility aspects.
Thus, in my opinion earnings management does not meet the ethical requirements of an executive job. To ensure that the executives or managers performance and decisions are in line with professional ethics, we must see whether their decision implementations would have negative effect on others. And in this case it is clearly affecting financial statement users.
How earnings management might affect the firm itself?
• Earnings management is not effective on the short term as it will not increase the firm’s profits, they may even worsen the enterprises operating difficulties if the executive decisions were not efficient or if they were not accurate in their expectations and anticipation of the future earnings.
• The earnings management opportunities might affect the firm future performance because the executive would be willing to sacrifice future cash flows for current period income.
• It may lead to damage the interests of shareholders and to lose their trust and confidence in

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