What is earning management in auditing?

What is earning management in auditing?

Earnings management is the use of accounting techniques to produce financial statements that present an overly positive view of a company’s business activities and financial position.

Why do managers engage in earnings management?

The primary reason to engage in earnings management is to make the stream of earnings seem more predictable and less volatile. The belief is that the stock market rewards a steadily growing and predictable earnings stream rather than a volatile one.

Can earnings management be an ethical practice discuss why or why not?

Earnings management may be considered unethical from a virtue perspective if, when earnings do not meet financial analysts’ earnings expectations or goals established for earnings, the company purposefully manipulates those amounts – an action that lacks honesty, reliability, and trust in the financial reporting …

What is meant by earning management?

Earnings management refers to a company’s deliberate use of accounting techniques to make its financial reports look better. Earnings management can occur when a company feels pressured to manipulate earnings in order to match a pre-determined target.

What is the difference between earnings management and earnings manipulation?

[6], accounting practices that violate the GAAP and IAS are called earning manipulation and fraudulent accounting. Moreover, if management uses their discretions which do not violate the GAAP or IFRS then it is called earning management. [9] the aggressive use of discretionary accrual causes earning manipulation.

What factors might have contributed to the company’s quality of earnings?

Those factors are innate, performance, company risk and industry risk. The quality of earnings was measured using attributes are accrual quality, persistence, predictability, smoothness, and the quality of factorial earnings, whereas the economic consequence was measured using security residual variance.

What is the difference between earning management and earning quality?

When management intervenes in the earnings reporting process in order to influence reported income numbers for their private gains, then managers have engaged in earnings management. That is, when managers do not intervene the earnings reporting process, earnings quality is high.

What are the earning management strategies?

An earnings management strategy uses accounting methods to present an excessively positive view of a company’s financial positions, inflating earnings. Earnings management is used by companies to flatten out earnings variations and present profits that are consistent each quarter or year.

What is earnings management and why does it occur?

Is earnings management always unethical discuss ways to control earnings management?

While managers generally view earnings management as unethical, managers who have worked at companies with cultures characterized by fraudulent financial reporting believe earnings management is more morally right and culturally acceptable than managers who haven’t worked in such an environment.

Is earnings management just good business practice?

Earnings management is “bad”, in the sense that it reduces the reliability of financial statement information. By using the financial statements to communicate the financial health of the firm, earnings management can be used to inform outsiders of management’s inside information as per their exercised expertise.

How does size of audit firm affect earnings management?

Using a sample of firms listed on the Athens Stock Exchange over a five-year period, we find that the size of the audit firm does not affect the level of earnings management, and the audit opinion qualification is not issued in response to management’s opportunistic behaviour.

What is the purpose of earnings management in accounting?

Earnings management takes advantage of how accounting rules are applied and creates financial statements that inflate or “smooth” earnings. In accounting, earnings management is a method of manipulating financial records to improve the appearance of the company’s financial position.

What is the role of external auditors in accounting?

Theoretically, external auditors play a key role as a monitoring mechanism in assuring the integrity of accounting figures and in reducing the agency costs, resulting from managers’ opportunistic incentives.1 However, the effectiveness of external ∗ Corresponding author. Tel.: +30 2310996452; fax: +30 2310996452.

Who is required to certify earnings management?

The Securities and Exchange Commission (SEC) has pressed charges against managers who engaged in fraudulent earnings management. The SEC also requires that the financial statements of publicly traded companies be certified by the Chief Executive Officer (CEO) or Chief Financial Officer (CFO).