Thus, the framework will only be used to the extent of four components of earnings management namely paper earnings management (PEM), real earnings management (REM), paper earnings fraud (PEF), and real earnings fraud (REF). PEM and REM relate to earnings management practices that comply with accounting standards and corporate laws in place while REF and PEF are earnings management practices that violate the standards and laws in place. Earnings Management Measurement The type of data used in this study shall be secondary data collected from the DataStream database. Such data is usually found from the financial statements of listed companies and therefore deemed reliable. Therefore, the issues of data reliability and validity for the present study shall not arise as no tools shall be developed for the collection of primary data. A number of approaches have been used by researchers to measure earnings management (Prior, Surroca and Tribo, 2007). According to McNicols (2000), three approaches have been commonly used. These are: specific accruals, distribution of earnings, and total accruals. The present study will employ the total accruals approach which consists of both discretionary accruals and non-discretionary accruals (Dechow et al. 1995). Prior studies presented two approaches for measuring totals accruals. For instance, Kothari (2005) uses the balance sheet method while Jaggi et al. (2009) use the cash flow approach. Following Jones (1991) and Dechow et al. (1995), the current or total accruals can be defined using the balance sheet method as: TACt = ?CAt - ?Casht - ?CLt + ?DCLt – DEPt Where: ?CAt = This denotes change in current assets in year t ?Casht = This is change in cash and cash equivalents in year t ?CLt = This is change in current liabilities in year t ?DCLt = This means change in debt included in current liabilities in year t. DEPt = This is depreciation and amortization expense in year t Collins and Hriber (2002) noted that the cash flow approach was a superior method than the balance sheet approach especially for companies experiencing mergers and acquisitions. Sun and Rath (2009) argued that the discretionary accrual approach is potentially ill-specified. This study therefore uses the cash flow estimation approach. Under the cash flow method, total accruals are estimated as follows: TAC t = Income t – Cash Flow t Where: Income = Earnings before extraordinary and abnormal items in year t Cash Flow t = Operating cash flow in year t Prior et al., (2007) noted that earnings management is estimated through discretionary accruals (DA) which are computed by “detracting the expected or non-discretionary accruals (NDA) from the total accruals (TA)” (p. 34). The DA and NDA can be estimated using the Kothari et al (2005) model. The model is different from the modified Jones model proposed by Dechow et al. (1995), and includes a non-deflated term that captures performance (ROA). Consistent with most empirical studies in earnings management, the present study will adopt the modified Jones model. The argument for the adoption of this model is best described by Alghamdi (2012) as follows: “The argument of this study is that management may engage in earnings management via discretionary revenues by timing the recording of these revenues, such as recording them at the year-end when the cash has not yet been collected. In this case, any
Earnings Management: The Continuum from Legitimacy to Fraud My Name Name of the Course 1 March 2013 Earnings Management: The Continuum from Legitimacy to Fraud Based on the theoretical framework from Yaping’s (2010) work, this study seeks to assess the earnings management practices of listed companies at the New York Stock Exchange (NYSE)…
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.
To define “earnings management” one can say that this term refers to legitimate and illegitimate actions by management, exerting a negative influence on the entity’s earnings. Thus, it is appropriate to define this term under the following conditions: both legitimate managerial activities on the one hand and the spectrum of fraudulent financial reporting on the other hand.
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.
3 pages (750 words)Research Paper
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