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

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Earnings Management: The Continuum from Legitimacy to Fraud

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. ...
ounting one can use their discretion to choose their own preferred way of recording sales or turnover of the company, the method of depreciation to be used by the company, the method of valuation of inventory, etc. This type of flexibility helps the managers of a company to represent the true and fair view of the company’s affairs and its earnings in the financial statements. Account Management: Accounting policies can be utilized by the managers of a company to accomplish the objectives of the management of the company and may not fulfil the essential requirements of the users. It can thus be used as a tool that can be managed and not as a means to provide true and fair view of the company. Interests of Managers: In theory, accounting information should provide relevant information to the users which can be used by them for various decision making process. Whereas in practice, earning management is more for the interest of managers rather than for the benefit of its users. Brief Literature Review Earnings management is a term which acts as a substitute for creative accounting. Trying to manipulate the earnings which are reported by the managers of a company, by taking help of some specific accounting process, is termed as earnings management. The company does so to influence its earnings in a short term horizon (Coenen, 2009). Earnings management makes use of accrual accounting. However, the main issue regarding this is that it becomes very difficult to differentiate between regular accrual accounting and earnings management (Larcker, & Tayan, 2011, p. 164). Now since management has discretion in earnings management, it can lead to fraudulent activities like wrong representation of data in the financial statements. Accounting standard boards have been striving hard ...Show more

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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…
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