Morality of Management Earnings

Topics: Budget, Financial statements, Question Pages: 4 (1092 words) Published: November 26, 2013


Morality of Earnings Management
FIN400-2 – Analyzing Financial Statements
Colorado State University – Global Campus
Jill Bale
September 11, 2013

Morality of Earnings Management
The term “Earnings Management” is a form of “number smoothing” used by a company’s management to manipulate or influence the company's earnings to match a pre-determined dollar amount. This is done in an attempt to keep financials stable, as opposed to showing financial fluctuations. When a company appears to be stable it has a greater chance of attracting investors, which in turn demands higher share prices. When a company is able to have higher share prices, the more likely they are to draw new investors. Likewise, a company that has low share prices is often a reflection of a company that is not doing well financially (Investopedia, 2009, para 2). Often, companies perform abusive earnings management practices in an effort to “make the numbers” (Inevestopedia, 2009, para 4). In order to do this, management may be tempted to “make up” numbers as a means of drawing investors or to make their company appear financially stronger than what it actually is. The methods used in earnings management can be varied, and may be done through manipulation of financial numbers or operating procedures (As cited by Gibson, 2013, p. 84). In a study conducted by the National Association of Accountants, a questionnaire was prepared which described 13 observed earnings management situations (As cited by Gibson, 2013, p. 83). Below are five listed generalizations that can be made by the study findings regarding short-term earnings management practices. 1. Respondents of the survey felt that earnings management practices utilizing accounting methods to be less acceptable than methods of operating procedure manipulation (As cited by Gibson, 2013, p. 84). Manipulation of operations can include something as simple as pushing shipping to the last day of the fiscal quarter or asking customers to...

References: Gibson, Charles H. (2013). Financial reporting & analysis. Mason, OH. South-Western Cengage Learning.
Investopedia. (February 26, 2009). What is earnings management? Retrieved from
Rosenzweig, Kenneth & Fischer, Marily. (1994). Business Readings. Institute of Management Accountants, from Management Accounting. Retrieved from http://www.investopedia.com/ask/answers/191.asphttp://college.cengage.com/accounting/resources/students/readings/22-rosenzweig.html
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