Top management gender and earnings management (2023)

FAQs

What are the 5 methods of earnings management? ›

There are five common strategies and techniques of earnings management. They include the Big Bath, Cookie Jar Reserves, Operating Activities, Materiality and Revenue Recognition methods.

Earnings management can be good and bad; it is considered good when there is no personal intention. It isn't good for the company if it uses these techniques to inflate its profit, as it can`t be done in the long term, or it will affect the company in the long run.

Accounting policy choice

Earnings management can occur when management have flexibility in making accounting choices in line with accounting standard requirements. These choices will lead to different timing and amounts of expense recognition and asset valuation.

Several techniques are used to manage earnings. Examples include lowering capitalization limits, changing from the last-in first-out method of valuing inventory to the first-in first-out method, cutting nonmandatory expenses for short periods, or attributing regular business expenses to a one-off, nonrecurring event.

Contemporarily, there are two key types of earnings management namely; accrual earnings management (AEM) and real earnings management (REM) and each of these have its backing of the GAAP.

Earnings management is a strategy used by the management of a company to deliberately manipulate the company's earnings so that the figures match a pre-determined target and to produce financial reports that present an overly positive view of a company's business activities and financial position.

It is bad if it is used to manipulate shareholders, attract investors by concealing company's financial problems, and conceal losses that could have severe financial implications in future.

Disadvantages of earning managementThe disadvantages of earning management is low return on assets. Return on assetsis the return received from the operating assets of a company. Return on assets can becalculated by dividing net income by the total assets of the company within a certain period.

Examples of REM include, but are not limited to, overproduction designed to decrease the cost of goods sold and the cutting of R&D investment to boost current-period earnings.

Is earnings management a GAAP? ›

A Definition of Earnings Management

Companies manage earnings when they ask, “How can we best report desired results?” rather than “How can we best report economic reality (the actual results)?” Earnings management includes selecting GAAP methods with concern for appearance rather than reality.

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 ...

Management of earnings can be unethical if it tries to deceive stakeholders by inflating earnings and painting a positive financial picture. This is because management's earnings and employability may be correlated to the company's earnings, which puts pressure on the management to present better earnings prospects.

Motivations for Earnings Management

Healy and Wahlen (1999) summarized the motivations for earnings management arise from: (i) capital market expectations and valuation; (ii)contracts that are written in terms of accounting numbers; and (iii) anti-trust or other government regulation.

Motives of earnings management can be organized thematically into contractual obligations, asset pricing, or influencing external parties which are carried out through the use of various earnings management techniques.

Three of the main types of income are earned, passive and portfolio. Earned income includes wages, salary, tips and commissions. Passive or unearned income could come from rental properties, royalties and limited partnerships. Portfolio or investment income includes interest, dividends and capital gains on investments.

What Are the Four Key Elements of an Income Statement? (1) Revenue, (2) expenses, (3) gains, and (4) losses.

Reporting income from investments or capital obtained by taking out a loan as business revenue. Capitalizing ordinary business expenses, thus shifting them from the income statement to the balance sheet. Inaccurately reporting liabilities – or altogether neglecting to report them at all.

Key Takeaways. A big bath is an unethical accounting tactic whereby income in a bad year is made to look even worse than it actually is. Often undertaken in a bad earnings year, this tactic is intended to artificially inflate future earnings figures.

Several grey zones in financial accounting

The role of human estimation and judgement in accounting means that there are a lot of grey zones, including revenue recognition, depreciation and amortization, asset impairment and contingencies.

Why is it hard to detect earnings management? ›

However, detecting manipulation in companies is not easy, because Earnings management is successful if it is invisible. Therefore, statistical models are usually used to detect these practices.

Earnings per Share (EPS) Explained

The ratio can be manipulated if the company were to buy or sell its own shares in the market, referred to as Treasury Stock. The net income aspect can also be manipulated through the recognition of revenue as well as other ways.

In these studies, the firm's ownership structure has a significant influence on earnings management, thereby influencing the earnings quality information on the financial statements.

Companies that manipulate their earnings are said to have poor or low earnings quality. Companies that do not manipulate their earnings have a high quality of earnings. This is because as a company's quality of earnings improves, its need to manipulate earnings to portray a certain financial state decreases.

Accrual-based earnings management aims to obscure true economic performance by changing accounting methods or estimates within the generally accepted accounting principles. Real earnings management alters the execution of real business transactions.

The fundamental problem with the earnings-management culture--especially when it leads companies to cross the line in accounting--is that it obscures facts investors ought to know, leaving them in the dark about the true value of a business.

Types of Earnings Management and Manipulation. Earnings manipulation is usually not the result of an intentional fraud, but the culmination of a series of aggressive interpretations of the accounting rules and aggressive operating activities.

Window dressing refers to a company dressing up the financial statements to make them look better for financial statement users. Internal targets are drivers of earnings management when a company has set its own internal goals and wants to be sure to meet them.

GAAP is the set of standards and regulations any publicly traded company in the U.S. is legally required to follow when preparing financial documents. Any accountant handling financial reports and information for these companies must adhere to GAAP guidelines.

External audit teams look specifically to make sure financial statements follow GAAP guidelines. Random financial transaction sampling, audit trails, account reconciliations, direct observation and personal interviews are common external audit tactics.

What are the most common mistakes managers make? ›

What is an unprofessional manager? An unprofessional manager is a staff member in a leadership position whose behavior or comments don't adhere to their organization's code of conduct or that negatively affects staff, customers or the business overall.

“You're always going on about that idea!”, or “You're always a couple days behind on that project!”, or “You never add to the agenda!” – any of these generalizations can put your team on the defensive and make them feel unsafe. Say this instead: Nothing.

Financial managers create financial reports, direct investment activities, and develop plans for the long-term financial goals of their organization.

Earnings management can be good and bad; it is considered good when there is no personal intention. It isn't good for the company if it uses these techniques to inflate its profit, as it can`t be done in the long term, or it will affect the company in the long run.

The main methods of financial motivation used in business are wages, salaries, performance related pay, profit sharing, and financial fringe benefits . Wages are an amount of money paid to an employee based on a number of factors, such as time rate, piece rate and overtime.

Money is a short-term motivator and has limited appeal

Yes, money is important, but that comes as a standard expectation with any job. People expect to be paid a fair wage, and without it, no amount of perks can attract or retain employees.

Three of the main types of income are earned, passive and portfolio. Earned income includes wages, salary, tips and commissions. Passive or unearned income could come from rental properties, royalties and limited partnerships. Portfolio or investment income includes interest, dividends and capital gains on investments.

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 rule 3 of income? ›

(3) The value of benefit to the employee or any member of his household resulting from the provision by the employer of services of a sweeper, a gardener, a watchman or a personal attendant, shall be the actual cost to the employer.

The term earnings refers to the profit or income a company earns after accounting for all other business expenses . Income statements list earnings on the bottom line, with all the deductions listed on the lines above it. Companies, investors and other stakeholders might refer to earnings as net income or net profit.

The essential difference between a salary and wages is that a salaried person is paid a fixed amount per pay period and a wage earner is paid by the hour.

Examples of earned income are: wages; salaries; tips; and other taxable employee compensation. Earned income also includes net earnings from self-employment.

Earnings is the total compensation earned by an employee and paid by the employer in exchange for the service provided by an employee which is calculated on payroll during the accounting period. Earnings include wages, salaries, and overtime pay.

In summary, earnings management will exert a negative impact on corporate reputation. Companies with a bad reputation tend to have a lower debt capacity. Companies with a higher reputation are perceived as those that perform well and exercise good corporate governance that upholds business ethics.

The main aim of Earnings management is the achievement of certain purposes by the. medium of manipulating relevant accounting practices, under generally accepted. accounting principles, so that the earnings shown on financial reports achieve pre- determined targets.

Motivations for Earnings Management

Healy and Wahlen (1999) summarized the motivations for earnings management arise from: (i) capital market expectations and valuation; (ii)contracts that are written in terms of accounting numbers; and (iii) anti-trust or other government regulation.

Earnings management is also known as income smoothing. This term refers to the practice of manipulating a company's financial statements to create a more stable and predictable pattern of earnings.