A scope of qualitative issues Various managerial activities can be hazardous for earnings allocation and distribution and earnings management can be a challenging issue. Different earnings management activities are focused on legitimate choices focused on account provision for transactions and for other events (e.g. when accounting estimates and judgments are in compliance with generally accepted accounting principles (GAAP). Legitimate management decisions can be influential for reported earnings. There is an intentional measure taken in the process of earnings management, such as fictitious transactions constituting constitute fraud. There are many cases, when the right-of-return privilege has been concealed from the auditor and fraudulent reporting occurs. It is appropriate to focus on exact facts and their influence on occurrence of fraud earnings management. Further consideration is devoted to the internal and external influential factors in the area of earnings management. Of course, the main emphasis is made on legal basis of earnings management and processing, but very often some other secondary triggers can evoke a reason for fraud. Therefore, in the process of earnings management there are many different activities, which cannot be easily classified. There is a continuum ranging from legitimacy to fraud. There are many factors, which exert influence on earnings management. Under certain conditions GAAP is focused on effects disclosure of these decisions in certain financial statements. There is a need for disclosure under the SEC’s rules and regulations for MD&A (Keim and Grant, 2003). GAAP distinguishes legitimate earnings management from fraud. Nevertheless, it is an ambiguous question if to decide whether the process of earnings management continuum is above the limit of legitimacy and is closer to fraud or not. Levitt (1998) claimed: “Accountants are wise enough to know they cannot anticipate every business structure, or every new and innovative transaction, so they develop principles that allow for flexibility to adapt to changing circumstances. That's why the highest standards of objectivity, integrity and judgment can't be the exception. They must be the rule”. World practice of accounting management has many different examples illustrating fraud in management practices. Thus, a well-known example of Enron illustrates malpractice of the company, which used different dubious practices in accounting, e.g. third party investors, subsidiary accounting etc (Gallhofer & Haslam, 2003). Fair policies in accounting are the utmost question for the modern companies. Earning management illustrates goodwill of the company. There are different legal documents regulating fair policies in accounting management and earnings management. The Sarbanes-Oxley Act is directed on accurate and reliable corporate disclosures provisions (Keim&Grant, 2003). Auditor involved should develop his practice with respect to the following regulations: “remaining alert, through observation and making inquiries as necessary, for evidence of noncompliance with relevant ethical requirements by members of the engagement team, determining the appropriate action if matters come to the engagement partner's attention that indicate that members of the en
Earnings Management: The Continuum from Legitimacy to Fraud [Name] [Date] Introduction Currently, fraudulent auditors’ reports and many other options of fraud occurrence in the process of money earning cannot be denied. Fraud in earnings management can occur on the following reasons: fraudulent financial reporting (financial misstatements) or misappropriation of assets…
There is a continuous argument in the audit circle on whether earnings management is another form of fraud. Fraudulent financial reporting engages deliberate misstatements or exclusion of figures or dissemination in financial statements as a part of a design to “manage earnings.” An external auditor should pay great attention to ‘earnings management ‘and the ‘quality of earnings and how earnings management is associated to and may be tantamount to fraud.
The profit of the company is known as Earnings. The analysts and the investors check the earnings of the company to determine the position of the stocks of the company, so Earnings management is also known as smoothing of profits or creative accounting. There are different ways of managing earnings of a company.
This research paper is useful in understanding the research framework and discussing worldviews as it relates to Earnings management: the continuum form legitimacy to fraud. Criteria for selection of a research method In conducting a research, a relevant research method should be selected.
The accountants and CEOs of many companies do not mind tasting this delicate dish full of fraudulent accountant transactions…there is a great degree of temptation and it is very difficult to stay aside and not to try this tasty food. Thus, the main ingredients of this fraudulent meal will be considered in terms of concepts of legitimacy and fraud in earnings.
In many companies accountants and managers are not afraid of being involved into fraudulent practices. The basic concepts "fraud" and "legitimacy" should be defined. Trochim & Donnelly develop a reliable basis for concepts considerations and development of further ideas in this research paper.
Earnings Management: The Continuum from Legitimacy to Fraud
This results due to manipulation of company’s f financial earnings either directly or through indirect accounting methods. The manipulations occur when the given management of a firm is unable to meet its investor’s expectations or wants to entice the public and other investors to invest in the company.
The framework will be used to discern the extent to which the earnings practices border on legitimacy or fraud. Given that the firms listed at the NYSE must adhere to the accounting standards and corporate laws governing them, this study assumes therefore that the laws and standards are in place.
The term earning management covers all the legitimate and illegitimate actions by the company's management that affects the earnings of the firm. The profit of the company is known as Earnings. The analysts and the investors check the earnings of the company to determine the position of the stocks of the company.
This research considers a general case then moves towards a specific case. This method considers a probable cause of a problem and anticipates validating its effect. The cause and effect factor depends on the strength of variables relationship. If the variables are strongly related, the relationship of cause and effect becomes highly probable.
5 pages (1250 words)Research Paper
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