Earnings Management: The Continuum from Legitimacy to Fraud - Research Paper Example

On the other hand, also, it may constitute fraud, which is an intentional deliberate misstatement or omission of material facts or accounting data which is misleading, and when considered with all the information made available would cause the reader to alter or change his or her judgment or decision. An earnings management is at the legal end of a continuum while financial fraud is at the illegal end. Fraud violates the main acknowledged accounting values. Virtually all administrative activities comprise a potential outcome on earnings, in that logic encompasses learning, songs management; if not, the activities most probably would not take place.

Hence, earnings management, in general, implies, conversely, that the actions that are reached are intended either to even earnings over more provisional or yearly accounting periods. It is designated to achieve a targeted wages level, conceivably to meet up and analyze the securities forecast as (Fischer & Rosensweig, 1995 quoted in Farag & Elias, 2012, p.185). While such actions are not per se specifically violations of the Generally Accepted Accounting Principles (GAAP), they may impact adversely on the accuracy of the information that may be drawn from financial statements.

Two important elements that are identified by the definition are inextricably linked to the concept of earnings management – specifically, consequences and intent (Farag & Elias, 2012). The necessary outcome of the actions is that the parties relying on the standards financial analysis procedures to gain information from the financial statements are misled as a direct consequence of these actions. The actions are also motivated by the clear intent by management to portray the business in a more favorable light, in a manner that is contrary to the moral or ethical standards to which the business management and the accounting professionals involved should be held.