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Earnings Management: The Continuum from Legitimacy to Fraud
Finance & Accounting
Pages 6 (1506 words)
Earnings Management: The Continuum from Legitimacy to Fraud Table of Contents Introduction 3 Brief Literature Review 5 Problem Statement 7 Purpose Statement 7 Research Questions 7 Question 1: 7 Hypothesis: 7 Question 2: 8 Hypothesis: 8 Question3: 8 Hypothesis: 8 Conclusion 8 References 10 Introduction The term earning management covers all the legitimate and illegitimate actions by the company's management that affects the earnings of the firm.
Though there are extensive accounting rules and policies to control and monitor the books of accounts or financial statements, yet some amount of flexibility or freedom is allowed. In accounting, freedom of choice is necessary to increase the efficiency of the accounting procedures However if companies want to use such methodologies for manipulating or inflating their earnings, then they can do so using creative accounting methods (Loughrey, 2011, p. 225). Earning management is a critical part of financial accounting because it provides information to the users of financial statements for interpreting and deriving conclusion about the performance of the company. Creative accounting practices are such malpractices in accounting which may be legal and in accordance with the existing standards but may not be in line with the true spirits of the rules laid down under accounting standards. In other words, when financial statements are prepared by the relevant managers of a company that is inconsistent with the purpose or intention of the existing accounting standards, then it is said to be a practice of creative accounting. ...
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