Earnings management is one of the most popular measures of financial business crimes, occurring in companies on a habitual basis. It can be defined as a process of intentional interference of the management in the establishment of the earnings of a business, misrepresenting the data to show better results than they actually are. Several reasons lead to management of earnings which include manager’s compensation, raising stock price, or pushing for government funding. There are different strategies available that managers can use for the purpose of earnings management and hence satisfy their selfish objectives (Wild, 2006, pp.86-87). With regard to the increase in financial crimes in businesses, and several instances of earnings management being reported, this study focuses on the literature of earnings management and analyzes the cases reported to draw a conclusion with a view on the concerned topic. Earnings management, in exchange listed companies, is not fraud but a case of caveat emptor for investors.
Earnings Management: An Overview
Earnings management is the process of intentionally misrepresenting financial data in the accounting measurements such that the company can show greater profits and more value than it actually has obtained. The process can be “cosmetic” where managers influence accruals without affecting cash flows or it can be “real” where cash flows are acted upon to manage earnings (Wild, 2006, pp.86-87). There are three usual strategies that managers can exploit for earnings management. ...Show more