The Continuum from Legitimacy to Fraud - Research Paper Example

This essay demonstrates that the suitability of an accounting policy under the requirements of Generally Accepted Accounting Principles (GAAP) draws a line on the continuum that distinguishes legitimate earnings management from fictitious accounting transactions. The process of determination of whether or when earnings management dealings do cross the line is essentially difficult to ascertain legitimacy to fraud, especially in certain situations on financial transactions. Legitimate earnings management in an entity translates to quality in earnings but with no reference to whether there has been a fair presentation of the financial statements that are convenient to the generally accepted accounting principles.

Auditors’ roles with regard to quality of the entity’s earnings are important though their responsibilities are spelled out in detection and reporting of fraud. Auditors need to address their judgments about quality and the acceptability of the entity’s principles of accounting and all the financial estimates that underlie the statements. Auditors should always inform the committee on the audit on the unacceptability approach at the end of the accounting period so as to improve the overall effectiveness of the corporate body on audit committees.

The communication between the auditors and the committee on the audit is seen as an avenue for enhancing clear understanding of the quality of earnings and all the issues related to it hence improving the level of financial reporting. . ?………………………42 4.0 Question #4 Overview: Ethical Considerations………………………………………..45 4.1 Recommendations…………………………………………………………………………46 4.2 Corporate mechanisms to avoid fraudulent Earnings Management……………………….50 4.3 Board oversight…………………………………………………………………………….51 4.4 External Audit and internal Audit reporting to Audit committee of Board………………..52 4.

5 Whistleblower procedures………………………………………………………………….52 4.6 Code of conduct and ethics of Financial Officers………………………………………….53 4.7 Philosophical Stance……………………………………………………………………….54 4.8 References…………………………………………………………………………………..55 Question #1 Overview —Theoretical and Conceptual Knowledge Introduction (Overview) 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.