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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

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 ...Show more

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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…
Author : laverne60
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