When Managing Earnings Becomes Illegal

1190 WordsApr 19, 20115 Pages
| When Managing Earnings Becomes Illegal | | | Jeneen Davis | 2/27/2011 | | MSAF 670/Spring 2011 University of Maryland University College Professor John Halstead Introduction The concept of earnings management is not a new thing. Its practice is actually very common among most companies. Managing earnings is not all necessarily bad. However, there is a fine line that shouldn’t be crossed. Corporate managers are under extreme pressures when it comes to meeting forecasted results. There are various factors that contribute to these pressures: external, company culture, and personal. Corporate management may use various transactions to help “make the numbers”. But, it is when the line between practical methods…show more content…
Manipulating earnings would allow them to avoid missing certain mandatory provisions and the consequences that would follow. Most often management engages in the earnings game because it is a part of the company’s culture. Financial goals are tied to earnings performance, the focus is only for short-term goals, and/or superiors make special requests in order to meet the goals. Management compensation is a powerful incentive tied to firm performance. It opens the door for managers to do whatever it takes to meet earnings projections and obtain their payouts (Duncan, 2001). When it comes to playing around with the numbers until they are just right, managers are only looking at the here and now. They may believe operating based on short-term earnings is in the best interest of the company. However, this has complete disregard for future long-term performance. Top executives, as well, have a significant amount of influence over earnings results. In a 2006 survey of CFO Magazine readers, the results showed that approximately 51% of CFOs can influence reported earnings by 3% or more (Durfee, D., 2006). According to Duncan (2001), managers would need to “learn to play the earnings game” to do more to achieve quarterly and year-end targets. Lastly, personal motives include, but not limited to, personal bonuses, promotions, and job retention. For some individuals, the idea of receiving a large sum bonus is motivation
Open Document