Use of Earnings Management - Book Report/Review Example

? Research Paper Analysis: Public Accountants’ Perceptions of The Acceptability of Earnings Management Practices through the Employment of GAAP in the Post-Sox Period Name Institution Research Paper Analysis: Public Accountants’ Perceptions of The Acceptability of Earnings Management Practices through the Employment of GAAP in the Post-Sox Period Introduction The use of earnings management is proving to be the center of a heated debate because it is literally killing the basic and fundamental purpose of accounting which is to create confidence in the stakeholders. But it is not happening and now people are so used to the concept of accounting irregularities that they do not care about them and therefore the stock prices just got immune to the historical effects of accounting and financial reporting blunders. The whole discussion signifies that people have accepted the presence of accounting frauds as a fundamental truth, due to this reason; they do not bother about them much. In the past, financial auditors wholeheartedly accepted the filthy practices of creative accounting and earnings management. Yet, the government of George W. Bush passed SOX to promote more care among financial auditors while analyzing the statements. However, in those days, when SOX was not employed, the auditors had an overwhelming tendency to approve the statements by giving an unqualified opinion that could not be used to support lawsuits and other legal actions. Nevertheless, the purpose and objective of SOX were to promote openness and transparency in the accounting practices. Still, the practices have remained filthy because auditors are reluctant in terms of challenging the accounting practices of corporations and therefore are subtly promoting corruption and deception in the world of accounting and financial management. This review paper will analyze the article entitled “Public Accountants’ Perceptions of The Acceptability of Earnings Management Practices through the Employment of GAAP in the Post-Sox Period”. It is the general presumption that Generally Accepted Accounting Principles are used as a means of hiding corruption and they are also being deployed in order to convert favorable profits into losses in the post SOX period. The idea conveyed in the paper being analyzed is not complex because it supported the fact that corruption and accounting irregularities grew with the introduction of SOX (McEnroe, 2010). Literature Review Earnings management is defined as a practice that uses Generally Accepted Accounting Principles to enhance or demolish businesses’ reported profitability. The businesses operating throughout the world are notorious for booking future earnings in order to increase their share-price. But, nowadays this strategy is not considered an effective one for causing an increase in the share-price because in present investors look and analyze the company’s ability and frequency of paying dividends before making an investment decision whereas they also anticipate notable increases in the payouts. The investing parties are also noted to be less interested in the presence and absence of accounting irregularities because they have grown aware of the fact that the increasing dividends simply mean that the business is doing great and they must stick to it as long as the dividends keep on growing. Additionally, businesses are reporting more losses than profits after the SOX’s introduction and strangely enough auditors still feel reluctant to give any qualified opinion about the matter (McEnroe, 2010). However, there are two possible reasons for this kind of behavior. Firstly, the accounting statements may represent the true and valid situation of the company or secondly the company’s dollars are at work to influence auditors’ views. However, the corrupt environment of Washington leads this author to believe that the latter explanation is more realistic in nature. According to Healy & Wahlen, (1999) earnings management and other creative accounting techniques are used by management to influence profitability. In view of this research effort earnings management allows the managers to talk to the future. But, it is a challenge for the management because recording future earnings are identified as a crime in the accounting world. Therefore, management should use caution while manipulating future incomes of the company. Furthermore, auditors and evaluators can notice earnings management by analyzing alignment of financial statements with matching principle, which states that an expense and income should be booked against the period against which they took place (Jones, 1991). In this way, the auditors can filter out the expenses and incomes that actually belong to some other period whereas it is also important to note that companies often mix expenses and incomes of the immediate past or future quarter with those of the present one so that they can modify the outlook of the company in front of the shareholders. It is quite alarming that auditors refrain from offering a qualified opinion despite stumbling upon concrete evidence that supports the presence of earnings management. In the view of many accounting specialists, the major reason for this kind of attitude towards accounting irregularities is investors’ lack of interest towards the presence and absence of irregularities in the accounting cycle of the company, as long as it is paying good to excellent return on the investment. Analysis of the Paper Q.1 The basic and fundamental purpose of the paper being analyzed was to see whether or not the application of the SOX fulfilled its purpose of sabotaging corruption and accounting irregularities from the corporate world (McEnroe, 2010). However, the answer to the above-mentioned question is no because according to the meta-analysis conducted during the study auditors are more careful in checking financial statements after the enactment of of SOX act. But, their reluctance towards reporting the irregularities by placing a qualified opinion is still intact while auditors’ tendency to accept the practices like earnings management and creative accounting also has been noticed if their application falls within the parameters of Generally Accepted Accounting Principles. Q.2 However, the paper states that the use of GAAP is no longer an appropriate method of covering up irregularities because it appears that auditors are getting more conservative in analyzing financial statements after imposition of SOX, which would also enhance their ability to pinpoint frauds (McEnroe, 2010). Yet, the auditors’ tendency to deliberately overlook things that fall under the head of GAAP is saving many companies from lawsuits. Still, the auditing committees use unqualified opinions to warn the companies about irregularities. Q.3 Yet, auditors have the authority of providing opinions that could be used as evidentiary material in a lawsuit. Based on the above argument, the companies are warned to abandon filthy accounting practices because the time is nearing when auditors will report questionable financial applications to the higher authorities while supporting litigations as well (McEnroe, 2010). Importantly, according to this review, auditors are getting more and more conservative in evaluating the financial practices of the companies while their distaste and dislike of questionable financial practices are growing fast. Q.4 The paper stated that the auditors are getting more and more conservative in analyzing the statements but for the time being they are issuing unqualified statements to point out accounting irregularities and this could change any moment. Therefore, the companies are suggested to deploy ethical and legal ways of managing money. Findings The key findings of this review are listed as follows The reviewed paper used the technique of meta-analysis in order to find whether or not the SOX act is effective in terms of uprooting corruption and questionable accounting practices of the corporate world Secondly, the paper highlighted the fact that investors are not bothered about the presence and absence of accounting irregularities and they consider the volume and frequency of dividend payouts as a means of deciding where to invest Thirdly, the review of the paper, revealed that the SOX could not fulfill its true purpose of eliminating corruption and unethical practices from financial management and accounting Despite SOX’s apparent failure, the act is providing an ethical direction to the art and science of financial management and sooner or later it is going to improve ethical standards in the industry of accounting Still, auditors are accepting the earnings management practices that fall within the parameters of GAAP. But, it is not going to last long because the time is near when auditors will initiate to report financial irregularities to higher authorities Conclusion This review has found that the companies are currently indulged in using questionable accounting practices as the means of boosting their attractiveness in the eyes of investors. However, the auditors are getting stricter and stricter in terms of evaluating financial statements. But, they are presently refraining from officially reporting these shortcomings. SOX act on the other hand is proving to be the source of lifting ethical standards in the industry of financial management. Investors are surprisingly not interested in the ethical standards of the company’s accounting cycle and they are only concerned with frequency and volume of dividend payouts. Well, the stock-prices are also found to be non-responsive towards the news of accounting irregularities because nowadays nobody bothers about them anymore. At the end, it is important to note that the companies are sailing in dangerous and uncharted waters by following unethical accounting practices because Generally Accepted Accounting Practices are not an effective way of covering up irregularities as auditors are finding it highly inconvenient to accept reports with irregularities on a consistent basis. References Healy, P., & Wahlen, J. (1999). A Review of Earnings Management Litrature and Its Implications for Standard Setting . Accounting Horizons Vol 13(4) , pp.365-383. Jones, J. (1991). Earnings Management during Import Relief Investigations . Journal of Accounting Research Vol 29(2) , pp.192-228. McEnroe, E. (2010). Public Accountants' Perceptions Of The Acceptability Of Earnings Management Practices Through The Employment of GAAP in The Post-Sox Period. Journal of Applied Business Research Vol 26(1) , pp.59-72. Read More