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The Construct surrounding Earnings Management.
Finance & Accounting
Pages 9 (2259 words)
Earnings management was defined as ‘actions by division managers which serve to increase (decrease) current reported earnings of a division without a corresponding increase (decrease) of the long-term economic profitability of the division’.
While such actions are not per se specifically violations of the Generally Accepted Accounting Principles (GAAP), they may impact adversely on the accuracy of the information that may be drawn from financial statements. Two important elements that are identified by the definition are inextricably linked to the concept of earnings management – specifically, consequences and intent (Farag & Elias, 2012). The necessary outcome of the actions is that the parties relying on the standards financial analysis procedures to gain information from the financial statements are misled as a direct consequence of these actions. The actions are also motivated by the clear intent by management to portray the business in a more favorable light, in a manner that is contrary to the moral or ethical standards to which the business management and the accounting professionals involved should be held. Actions Constituting Earnings Management There are two types of intentional misstatements which are significant in the auditor’s assessment of fraud. These are (1) misstatements that arise from fraudulent financial reporting, and (2) misstatements that arise from the misappropriation of assets (also known as defalcation). Classified under the first type are those intentionally false and misleading statements, or the omissions of amounts or disclosures that should be included in financial statements. ...
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