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Earnings Management: The Continuum From Legitimacy To Fraud
Finance & Accounting
Pages 4 (1004 words)
Activity 3 and 4 Earnings Management Name: Institution Activity 3: Theoretical Perspective Introduction According to McKee, earnings management involves the financial reports and accounts exploitation by management of a firm to alter the view of a company from its present financial position.
Examples of the affected corporate firms are Enron and WorldCom, which illustrate how opportunistic earnings resulted in the greatest bankruptcies in the history of the US. However, there are claims that earnings management has some beneficial uses too (McKee, 2005). Evidence empirically shows that earnings managing firms have an inverse relationship with agency costs, but when combined, management of earnings is not detrimental on an average. Consequently, several earning management stimuli, evidence for and against each theory of stimulus, and recognition of earnings management are analyzed. Firm managers are to a certain extent allowed to choose suitable reporting systems, approximates and disclosures concerning the firm's business economics. This enables the financial reports to portray more valuable and useful information to the users. Since both auditing and accounting are not exact science, the management of a firm has a mandate to settle on how financial reports information is presented. Therefore, when the managers’ decisions on reporting methods and estimates are inaccurate, risks in management of earnings occur (Cozby, 2009). This can adversely influence the opinion of users who depend on the information of these financial reports. Earnings management is an emerging issue in the field of accounting given the latest Enron and WorldCom corporate failures. ...
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