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What is earnings management? Earnings management occurs when managers use judgment in financial reporting in structuring transactions to alter financial reports to either mislead some stakeholders about the underlying economic performance of the company, or to influence contractual outcomes that depend on reported accounting numbers. Most companies begin their abusive and fraudulent practices by engaging in earnings management schemes designed primarily to “smooth” earnings to meet imposed earnings forecasts and analysts’ expectations.
In the past several years, SEC investigations have uncovered earnings management practices that have pushed the boundaries of GAAP, even committing out-right fraud.
In his 1998 Numbers Game speech, former SEC Chairman Arthur Levitt expressed his concern that too many corporate managers, auditors, and analysts let their desires to meet earnings expectations override good business practices. He called for a fundamental cultural change on the part of corporate management and the entire financial community.
Levitt’s speech indicated that the SEC would target companies that engaged in “practices that appear to manage earnings,” without clearly distinguishing between earnings managed in the ordinary course of business and earnings fraudulently managed in a deliberate attempt to deceive the financial community. ... Chairman Levitt (1998) identified five popular examples of “accounting hocus pocus” that could be used to create illusionary earnings:
· big bath restructuring charges
· creative acquisition accounting
· cookie jar reserves
· immaterial misapplications of accounting principles
· premature recognition of revenue
All of the described have been discovered more than other indiscretions.
Approximate Word count = 1086
Approximate Pages = 4.3
(250 words per page double spaced)
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