Earnings management refers to reasonable accounting practices used to achieve stable financial results, as opposed to illegal manipulation. It can involve choosing accounting methods, estimates, transactions timing, or disclosures to manage earnings. Reasons include income smoothing, meeting forecasts, or maintaining share prices. Earnings management is detected by analyzing revenue recognition policies, accounts receivable, asset capacity, and comparing income to cash flows. While it can conceal information, some argue it provides a "smooth ride" for shareholders. Surveys found tolerance for creative accounting varies internationally. Accountants must be aware of potential abuse or manipulation.
Creative Accounting and Impact on Management Decision MakingWaqas Tariq
The study was conducted to appraise the impact of creative accounting on management decisions of selected companies listed in the Nigerian Stock Exchange. With the background, the main objective of the study includes the examination of the extent to which macro-manipulation of financial statement affects management decisions; to examine the extent to which macro-manipulation of financial statement affects share price performance; and to determine the impact of misreported assets and liabilities as well as making recommendations to help remedy some of the problems. The research method used was descriptive and the primary data collected were summarized and tabulated. These were picked in line with the hypothesis variables of the study so as to determine their validity. It was observed that the application of creativity in financial statement reporting significantly affects the decision of management to recapitalize the firm upward or dispose of it reserves. The study concluded that creative accounting through macro-manipulation of financial statements affects a firm’s price and capital market performance. In view of the study, the researcher recommended that the application of creative accounting on management decision should be to avoid misreporting of assets and liabilities in their financial report, and that management decision towards creative accounting should be geared towards the relative advantage principle and good corporate governance which encourage challenges to current ways of thinking and not manipulating for self interest.
The slippery slope is described as ‘playing the system’, ‘beating the system’, and fundamentally neglecting the laid down rules, regulation within the system for selfish reasons. This presentation revealed the justification, ethical or otherwise for creative accounting, aggressive earnings management and related concepts as it affects the professional judgement of fraud examiners. The role of fraud examiners is put to light in ensuring that the users of financial statements are not continued to be put in the dark with respect to the state of the concerned company. This presentation also explores both positive and negative side of Creative accounting and revealed the consequences of the same within the context of fraud examination and financial reporting structures. It is concluded that The use of aggressive accounting techniques may not necessarily be fraudulent. However, it may be the start of a slippery slope, where legitimate earnings management descends into earnings manipulation or fraudulent accounting. This presentation recommends that fraud examiners should take seriously the ACFE code of ethics in resolving the allegation of fraudulent activities as may also concern creative accounting by seeing the bigger picture.
Creative Accounting and Impact on Management Decision MakingWaqas Tariq
The study was conducted to appraise the impact of creative accounting on management decisions of selected companies listed in the Nigerian Stock Exchange. With the background, the main objective of the study includes the examination of the extent to which macro-manipulation of financial statement affects management decisions; to examine the extent to which macro-manipulation of financial statement affects share price performance; and to determine the impact of misreported assets and liabilities as well as making recommendations to help remedy some of the problems. The research method used was descriptive and the primary data collected were summarized and tabulated. These were picked in line with the hypothesis variables of the study so as to determine their validity. It was observed that the application of creativity in financial statement reporting significantly affects the decision of management to recapitalize the firm upward or dispose of it reserves. The study concluded that creative accounting through macro-manipulation of financial statements affects a firm’s price and capital market performance. In view of the study, the researcher recommended that the application of creative accounting on management decision should be to avoid misreporting of assets and liabilities in their financial report, and that management decision towards creative accounting should be geared towards the relative advantage principle and good corporate governance which encourage challenges to current ways of thinking and not manipulating for self interest.
The slippery slope is described as ‘playing the system’, ‘beating the system’, and fundamentally neglecting the laid down rules, regulation within the system for selfish reasons. This presentation revealed the justification, ethical or otherwise for creative accounting, aggressive earnings management and related concepts as it affects the professional judgement of fraud examiners. The role of fraud examiners is put to light in ensuring that the users of financial statements are not continued to be put in the dark with respect to the state of the concerned company. This presentation also explores both positive and negative side of Creative accounting and revealed the consequences of the same within the context of fraud examination and financial reporting structures. It is concluded that The use of aggressive accounting techniques may not necessarily be fraudulent. However, it may be the start of a slippery slope, where legitimate earnings management descends into earnings manipulation or fraudulent accounting. This presentation recommends that fraud examiners should take seriously the ACFE code of ethics in resolving the allegation of fraudulent activities as may also concern creative accounting by seeing the bigger picture.
This presentation gives us an insight about how creative accounting can be. But this creative forms may also sometimes lead to fraud. This presentation will tell you what legal actions are taken when such a crime is committed.
Finance for non finance managers module 1 financial accounting basicsShahid Hussain Raja
Welcome to this one day intensive course on finance for non finance managers/professionals
Besides learning essential concepts, we will discuss the difference among financial accounting, management accounting and financial management
In Module 1, we will discuss the basics of financial accouning such as financial transactions, jargon used, conventions etc
Also the various ways of presenting these accounts-basic information about the three financial statements
Welcome to Module 2 of One day intensive course on Finance for Non finance Managers/Professionals
This course consists of five modules, each dealing with different aspects of financial management.
One of the core elements of financial management is the three financial statements
Module 2 relates to discussion of the Blance Sheet-what is a Balance Sheet and how to read, interpret and use it
This presentation gives us an insight about how creative accounting can be. But this creative forms may also sometimes lead to fraud. This presentation will tell you what legal actions are taken when such a crime is committed.
Finance for non finance managers module 1 financial accounting basicsShahid Hussain Raja
Welcome to this one day intensive course on finance for non finance managers/professionals
Besides learning essential concepts, we will discuss the difference among financial accounting, management accounting and financial management
In Module 1, we will discuss the basics of financial accouning such as financial transactions, jargon used, conventions etc
Also the various ways of presenting these accounts-basic information about the three financial statements
Welcome to Module 2 of One day intensive course on Finance for Non finance Managers/Professionals
This course consists of five modules, each dealing with different aspects of financial management.
One of the core elements of financial management is the three financial statements
Module 2 relates to discussion of the Blance Sheet-what is a Balance Sheet and how to read, interpret and use it
Analysis of financial statements & earnings quality: Textiles IndustryPip Freixas
This study is done on secondary data primarily published Annual Reports of companies of Textile industries of Bangladesh. Mainly various types of ration analysis has been conducted and finally which company could be the prospective company for investment has been identified. Earning quality and Z-score have also been considered.
Bookkeeping_ Your Ally in Tax Compliance and Optimization - Google Docs.pdfJames Forootan
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Introduction, Accounting as an Information System, Branches of Accounting, Meaning of Financial Accounting, Users of Accounting Information- GAAPS- Basic Concepts and Conventions- Accounting Standards issued by ICAI and IFRS issued by IASB- Manual Vs Computerized Accounting.
The Importance of Accurate Financial Reporting for Small Businesses.pdfsarikabangimatam
For small businesses to thrive and stay in business, accounting documentation is essential. Through timely and dependable financial reports, business owners can keep an eye on their money, make well-informed decisions, and adhere to regulatory obligations. This article includes helpful advice for enhancing your financial reporting and accounting techniques in addition to a discussion on the significance of appropriate financial reporting for small Business Accountants in Delaware.
The exploitation of loopholes in the financial regulation and accounting standards in order to gain advantage or present figures in a misleadingly favourable way by the corporate entities.
3. EARNINGS
Bottom Line or Net Income
It shows value added activities
The value of a company’s stock =
the present value of its future earnings
4. EARNINGS MANAGEMENT
- Reasonable and legal management decision
making and reporting intended to achieve
stable and predictable financial results.
- not to be confused with illegal activities
(Cooking the books)
5. Definition given by Kamal Naser :
Creative accounting is the transformation of
financial accounting figures from what they
actually are to what preparers desire by taking
advantage of the existing rules and/or
ignoring some or all of them.
6. The definition of earnings management does not
rely on any particular item in the income statement.
Earnings management can also occur in
supplementary disclosures and may target
financial ratios instead of earnings.
7. OTHER NAMES
- Account hocus-pocus
- Financial statement management
- The numbers game
- Aggressive accounting
- Juggling the books
- Financial Statement Manipulation
- Accounting Magic
- Borrowing income from the future
- Banking income for the future
- Window Dressing
8. METHODS
1. Choosing between different accounting
methods
2. By estimation, judgement and prediction
3. Artificial transactions
4. Timing of genuine transactions
9. ACCOUNTING CHOICES
Accounting choices should be made within the
framework of GAAP.
Everyday accounting choice may be either
legal or illegal
There is no clear posted limit beyond which a
choice is obviously illegal
10. EXAMPLE
Estimation of warrranty cost
Revenue : $30.00
Warranty Expense : (2.75)
Income : $27.25
Past five years: ranged from $2.50 to $2.80
$2.50 and $2.25 would be justified, but $1.25
would be crossing the line to financial fraud.
11. Fraud
“the intentional, deliberate misstatement or omission of material
facts, or accounting data, which is misleading and, when
considered with all the information made available, would cause
the reader to change or alter his or her judgement or decision.”
Earnings management is at the legal end of a
continuum.
Financial fraud is at the illegal end.
GAAP may also be violated by “overly
aggressive accounting”
12. The Earnings Management – Fraud Continuum
We assume that there is evidence that quality
control improvements could lower warranty
costs to $2.25
13. Now we assume that there is absolutely no evidence
that quality control changes can lower future warranty
costs under the historical $2.50 - $2.80 range.
The $2.25 figure is now “overly aggresive”
and beyond the bounds of GAAP.
14. REASONS
1- Income smoothing
Reporting a steady growth in profit rather than
to show volatile profits
Making unnecessarily high provisions for
liabilities and against asset values in good
years
15. It is a measure against the 'short-termism'
Avoids raising expectations so high in good
years
'big bath' accounting
16. 2- Manipulating profit to tie in to forecasts
3- Maintain or boost the share price
- by reducing the apparent levels of borrowing
- makes company appear subject to less risk
- by creating the appearance of a good profit trend
- to raise capital from new share issues
- offer their own shares in takeover bids
- resist takeover by other companies
17. 4-
Delaying the release of information for the market
Enhancing opportunity to benefit from inside
knowledge
Companies are subject to various forms of
contractual rights, obligations and constraints
Example
18. HOW IS EARNINGS M DETECTED?
By looking at the Revenue Recognition
- Read the footnotes
- Look for the ways in which companies
recognize their revenues
- Is there any recent changes in the policies?
19. Delivering the product / performing the service
- try to find details in the notes to the financial
statements
20. By monitoring Accounts Receivable
- Follows customers who buy on credit
- Compare the turnover ratio
- Check the percentage rate of change
21. By Checking the Capacity
- Revenue per employee
- Revenue per dollar value of property, plant,
and equipment
- Revenue per dollar value of total assets
22. HOW IS E M DETECTED?
BY CASH FLOWS
Recent academic research found that we
could detect accounting tricks by comparing
net income to operating cash flow.
But the occurrence of rising earnings
combined with falling cash flow doesn't
necessarily imply accounting tricks.
23. HOW TO PREVENT ?
1. Focus on cash flow rather than income
numbers
2. Put more than one person in charge of the
accounting
3. Don’t let investors and partners mix
company business with personal investments
4. Have an independent auditor go over the
statements
24. AN OPPOSING VIEW
Even when earnings management conceals
information, it can still be beneficial to
shareholders. Arya, Glover, and Sunder state:
« A managed earnings stream can convey more
information than an unmanaged earnings stream. A
smooth car ride is not only comfortable, but it also
reassures the passenger about the driver’s expertise.»
24
25. Two Surveys on Creative Accounting
A substantial minority in each country takes a tolerant
view of creative accounting.
More optimism in Spain on resolving the problem.
26. FINAL NOTES
Creative accounting offers a challenge to the accounting
profession. Accountants need to be aware of the scope
for both abuse of accounting policy choice and
manipulation of transactions.
The problem is an international one, with accounting
policy choice being a particular problem in the Anglo-
American tradition and transaction manipulation a
particular problem in the continental European tradition.