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The Continuum From Legitimacy To Fraud - Research Paper Example

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The Continuum From Legitimacy To Fraud

The archival research employs the use of secondary data, making it difficult to determine proxies for managing of earnings. Several models developed for this proxy are unable to distinguish accurately amid opportunistic behavior of managers and true performance. Another archival research limitation is the inability to tap the managers’ incentives into earnings management. This research type has founded its argument on economic theory in an attempt to explain the occurrence of earnings management (Cozby, 2009). It is hard to confirm beyond doubt that firms with the motivating factors such bonuses, debts covenants and political reasons undertake earnings management because of these factors. Behavioral researchers have tried to handle these shortcomings by giving proof of the behavior of earnings management, which has greater construct validity (implying easily to measure and define) than archival perspective. Several methods can detect and measure earnings management empirically. The most discretional method is the discretional accrual, which assumes that managers can depend on their discretional ability concerning some accruals to use as the proxy testing of earnings management (J. W. Creswell & J. D. Creswell, 2009). Another method is single accrual where only one of accrual types, say depreciation estimates, exists. This method is ineffective because of difficulty in establishing the exceptional accrual required to manage earnings. In the distribution method of earnings management testing, loss reporting is avoided (McKee, 2005). ...Show more

Summary

This essay discusses earnings management, that involves the financial reports and accounts exploitation by the management of a firm to alter the view of a company from its present financial position. It is sometimes known as creative accounting, and the downfall of most companies is blamed for fraud…
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The Continuum From Legitimacy To Fraud essay example
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