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Earnings Management: The Continuum from Legitimacy to Fraud
Finance & Accounting
Pages 38 (9538 words)
Earnings Management: The Continuum from Legitimacy to Fraud Question. Earnings management entails an extensive range of illegitimate and legitimate actions undertaken by companies and business organizations’ managements, affecting the entire legal entities’ overall earnings.
In understanding this phenomenon of earnings management, it’s important to have a wide overview of the legitimate managerial activities carried out in an entity and the fraudulent reporting that is spearheaded by accountants and the entire management of an organization. The management of earnings leans on the credibility of financial information which is adversely affected by legal or illegal undertakings. All managerial activities within an organization have various implications and potential effects on earnings management. Such activities are designed in a view to run earnings in a smooth manner in predetermined accounting or financial periods or to achieve a certain earnings level to meet the objectives of the management and the analysts’ forecasts in the financial market. Earnings management activities constitute legitimate open and optional choices made of when and why to engage in financial transactions that need recognition of accounting. Unlike the end-year tax planning decisions that are made by the management to help accelerate deductions or even suspend income which is taxable on the basis of various considerations; discretionary actions may not overrule critical considerations. ...
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