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Economic Effect of Tightening Accounting Standards to Restrict Earnings Management

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Added on  2019-09-21

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This article discusses the economic effect of tightening accounting standards to restrict earnings management. It explains how tightening accounting standards can decrease earnings management and provide relevant information about the capital market. The author distinguishes between real and accounting earnings management and describes how tightening accounting standards might lead to a substitution effect that increases real earnings management. The article also explores the equilibrium model and its consequences, as well as the effects of tighter accounting standards on the quality level and total cost of earning management. Finally, the author concludes that while tightening accounting standards can increase earning quality, it may also increase the cost of earning management and decrease the value of the firm.
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Running Head: Economic Effect of Tightening Accounting Standards to Restrict Earnings ManagementEconomic effect of TighteningAccounting Standards to RestrictEarnings Management
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Economic Effect of Tightening Accounting Standards to Restrict Earnings Management1Summary The author Ralf Ewert describe the topic "Economic effect of Tightening Accounting Standards to Restrict Earnings Management" in which it explains that the tightening accounting standard should decrease the earning management and this will provide the relevant information about thecapital market. The author distinguishes the real and accounting earning management that assumes a standard setter which could influence the earning of accounting management by tightening the standards. (Ewert, R, et al., 2005)The author describes that the accounting standards setter which usually perceives the earning management as undesirable and the attempt are made that will reduce the earnings management by contraction the accounting standards. One of the authorSchipper tells about the tightening accounting standards which might lead to substitution effect which results in decline the accounting earning management by which it will increase the real earning management. (Schipper. K, 2003). The author provides the result in which he tells about the contraction of accounting standards which will increase the quality of earnings, which are measuring by the measured by the inconsistency of the reported earnings and the association among the market price reaction and the reported earnings. After that Ralf Ewert tells about the equilibrium model where he found that the earning quality increase with tight standards but there are several consequences which might affect this type of benefit. It involves different situation as Firstly; the manager will increase the costly retained earnings management as the advanced earning quality might increase the marginal benefits of real earning management. Secondly, the tighter standards will increase the expected accounting
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