They are characterized by excessive complication and the use of novel ways of characterizing income, assets, or liabilities and the intent to influence readers towards the interpretations desired by the authors. The terms "innovative" or "aggressive" are also sometimes used. Other synonyms include Cooking the books and Enronomics.
Before diving into what earnings management is, it is important to have a solid understanding of what we mean when we refer to earnings. Earnings are the profits of a company. Investors and analysts look to earnings to determine the attractiveness of a particular stock.
Companies with poor earnings prospects will typically have lower share prices than those with good prospects. Remember that a company's ability to generate profit in the future plays a very important role in determining a stock's price. For more on this concept, check out our Stock Basics tutorial.
That said, earnings management is a strategy used by the management of a company to deliberately manipulate the company's earnings so that the figures match a pre-determined target.
This practice is carried out for the purpose of income -smoothing. Thus, rather than having years of exceptionally good or bad earnings, companies will try to keep the figures relatively stable by adding and removing cash from reserve accounts known colloquially as " cookie jar " accounts.
Unfortunately, there's not much individuals can do to suss out abuses. Accounting laws for large corporations are extremely complex, which makes it very difficult for retail investors to pick up on accounting scandals before they happen.
Although the different methods used by managers to smooth earnings can be very confusing, the important thing to remember is that the driving force behind managing earnings is to meet a pre-specified target often an analyst's consensus on earnings.
As the great Warren Buffett once said, "Managers that always promise to "make the numbers" will at some point be tempted to make up the numbers.management that may not be very powerful in identifying earnings management. That is, the current research methodologies simply are not that good at identifying managers and.
Earnings management is valuable when, for instance, it con- veys forward-looking, value-relevant information, by removing some of the noise in a truth-telling report of short-term earnings.
Description: Define the phrase ucearnings management. ud Under what conditions, if any, is earnings management acceptable? Do auditors u responsibilities include actively searching for instances of earnings management by clients? This publication discusses common business expenses and explains what is and is not deductible.
The general rules for deducting business expenses are discussed in the opening chapter.
The chapters that follow cover specific expenses and list other publications and forms you may need. Note. Section. To someone new to the world of finance, the phrase "earnings management" might seem innocuous -- and maybe even sound like a good thing. In reality, earnings management is the act of manipulating a company's accounting to make its profits look better.
Earnings management 1. Earnings Management,Mohammad JafariramshehJuly IntroductionIn order to discuss earnings management and what its effects are on business and whether or not it's a good thing, we must first understand what earnings management really is.