Earnings Management Techniques and Controls

The assignment provides a comprehensive overview of earnings management, including its techniques, motives, and controls. It discusses the effects of earnings manipulation on financial reporting and corporate governance, highlighting the importance of transparency and accountability in financial markets. The assignment also explores the regulatory frameworks and institutional arrangements that aim to prevent or mitigate earnings manipulation.

Financial Reporting

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
1........................................................................................................................................................1
Earning management method and objectives.........................................................................1
2........................................................................................................................................................4
Constraining earning management and the role of corporate governance mechanisms........4
CONCLUSION................................................................................................................................5
REFERENCES................................................................................................................................6

INTRODUCTION
To analyse organisational position through its financial statements and reports which in
turn helps in making the adequate assumption by stakeholders for their investments decision in
the firm. There earnings management helps in monitoring financial tools such as equity capital,
debts and assets of entity which in turn beneficial to gather the large numbers of shareholders.
However, in terms of Real earnings' management fruitful for business to make efforts for their
desired or target earning in the specific period which will be based on deviation from operating
or investing activities. On the other side, Accrual earning objectify the actual performance of the
firm during such duration will be analysed by income and expenditures of the firm as well as
cash flow transactions. Thus, the motive behind such earning management is to reflect the true
performance of business among suers of such informations that will help in capital gathering of
the firm.
1.
Earning management method and objectives
Motive and Methods:
The objectives behind implementing the techniques of managing the earnings of the
organisation is based on the several analyses of the financial tools such as debt equity, cash flow
statement of the business as well as the adequate monitoring of the books (Techniques, Motives
and Controls of Earnings Management, 2013). However, such techniques must be adopted by
firm in context with motivating the managers to make the fruitful changes in their operational
activities. However, it focuses over the disclosure of the accounts and statements in the report
from with which the stakeholders or investors of the firm will make decisions to make
investments. Thus, there has been various motive for such earning management such as:
Window Dressing: In consideration with this technique the organisation design or
presents the report in these manners which look attractive as well as reflect that the business is
doing good as well as earning well. Hence, it will be belongs to dressing up the financial
statement like shown more adequate profits or reducing the expenses of losses of business
(Bratten, Payne and Thomas, 2016). Hence, such techniques helps in attracting the shareholders
as they make estimate that the business is profitable for them in having the adequate returns over
their investments such as dividends etc.
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Internal Targets: In order to balance the earning techniques of the organisation there will
be requirement of monitoring the internal operations of each departments and unit of the firm.
Hence, it can be said that with the help of such functions the managers will be able to gather the
adequate funds to meet the requirements of cost for such units (Chen, Dong and Gu, 2016).
Hence, it can be fruitful as if the professional plan budgets for each departments as well as
execute them. However, such small targets or goals will help the workforce to make the adequate
efforts and they will be able earn goals of business.
Income Smoothing: Stakeholders make investment in the organisation which has the
substantial or constant growth pattern and do not have any draw backs in the earning pattern.
Hence, managers in the firm seeks for lowering down the income fluctuations as well as attaining
the changes which will help them in smoothing the income.
External expectations: This motivates managers in making disclosure of such financial
accounts in consideration with analysing the requirements of such shareholders or investors such
as transparency in financial reports, statements must be in the authenticated formate which are
decided by IFRS and IASB. Thus, such tools helps in inviting the adequate numbers of investors
in the firm (Dinh, Kang and Schultze, 2016).
Contracting and other incentives:
In accordance with Fleming and Koppelman, (2016), the disclosure of financial reports,
organisation which in turn helps in presenting adequate informations. Hence, such details are
relevant to operational activities of firm during the period such as making investments in new
plan or project. Barth and et.al., (2016) stated that, with the help of such earning management the
professional of organisation will be able to make the investments in the new projects as well as
plans for expanding the bushiness operations. Hence, such helps in making the adequate changes
in the operational activities such as lowering down the costs as well as enchaining the business
consequences.
However, Dou, Khan and Zou, (2016) criticised that, the disclosure of such statements
and reports must be based on authenticated forums which describes the laws and principles of all
the accounting boards such as GAAP, IFRS and IASB. Hence, in accordance with Irani and
Oesch, (2016), theses disclosure must contains informations which are relevant to the operational
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investments of business as well as revenue generated by firm through such sources such a
making adequate analysis of the expense incurred in such business operations.
Uses of earning management and accounting methods by firms
There would be various techniques which are need to be used by the firms in context with
making the adequate enhancement in the operational performances (Earnings Management,
2017). Hence, there can be use of these five earnings management methods such as:
Big bath: This can be known as the part of income smoothing which considers the all the
major expenses or losses in thee current year so the upcoming period will reflect the adequate
turnover in the accounts (Rathke and et.al., 2016). For instance, FASB has recently used the
statements which in turn reduce the magnitude for adopting the big bath with which the firm will
do or not do to use such techniques.
Cookie Jar reserves: This technique of managing the earning of the year is somehow
same with the operational activities of business such as professionals considers the estimated
expenses or income from the past year and then shift some reserves to the next year as an
accrued income (Dichev and et.al., 2016). Hence, with the help of such method the companies
will be fruitful in planning for the further investment projects.
Operating activities: In consideration with this technique the earning and the income
acquired by the professionals which in turn depends over the costs or expense made to purchase
and spend in the fruitful operational plans (Commerford and et.al., 2016). Hence, there could be
use of various kinds of operational activities which in turn helpful for the business to enhance the
efficiency of the workforce so that can bring outcomes in the coming time.
Revenue recognition: On the basis of this method the organisation will be able to analyse
and measure the requirements of funds to meet the costs of new innovations such as expansion of
the business objective or operational areas. Hence, with the help of such technique the managers
records all the income or revenue earned by the firm and then estimation were made over the
assumption of the future expense. Hence, which in turn helpful for analysing the ability of firm
to meet such big expenses as well as gain the adequate turnover.
Materiality: In terms of accounting the materiality of small scale enterprises will be
beneficial in these regards. Hence, the auditors of the firm reflect the trades made by them as the
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non material transactions which in turn reflect the misstatement (Xue and Hong, 2016).
However, the materiality allowed firms to slightly fudge their numbers and make the adequate
forecasting of such statements.
2.
Constraining earning management and the role of corporate governance mechanisms
Role of governance mechanism in constraining earning
According to Collins, Pungaliya and Vijh, (2016), The constraining earnings'
management must be based on the evidences as it specify with the authenticated informations as
well as reflects the truth in such statements. Hence, in context with Author, the disclosure of the
constraining earning is based on the adequate informations which re relevance to the three types
of revenue mechanism such as Real earning management, accrual and classification and shifting
methods. However, such techniques helps in making the adequate changes in the operational
activities such as monitoring the equity capital management as well as analysing the
requirements of funds to enhance the operational functioning of the firm.
However, in terms of Capkun, Collins and Jeanjean, (2016), the study over such
techniques which will help the managers in analysing the classification and shifting as well as
the ability of the firm in meeting the future requirements which are constraint. Hence, such
information must be relevant with the facts and the authenticated transaction made in the
accounts of the firms. Thus, it will be fruitful for managers and the external stakeholder to
analyse the profitability of the business as well as the level of funds will be required in meeting
the operational expense. Hence, the shareholders of investors seeks the profitability in making
the investment in organisation. In accordance with Bratten, Payne and Thomas, (2016), they can
seek the annual turnover or the all major projects of the firm which in context with giving the
fruitful returns to company. Hence, their investments were based on the earning made by entity
as well as the various dividend policies acquired by them. In accordance with Fleming and
Koppelman, (2016), there is need to understand the requirements of the stakeholders such as they
need the adequate returns over their investment as well as it must be profitable for them in the
coming time. There is need to have the fruitful dividend policies which in turn reflects the ability
of firm in meeting the operational requirements (Irani and Oesch, 2016).
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In consideration the view of Bratten, Payne and Thomas, (2016), the disclosure of such
financial statements will be fruitful in making the adequate changes in the economic conditions
for the firm. Hence, it will help in inviting or attracting the large numbers of investors and that
will rise the capital structure of the firm. Hence, it will be fruitful for making the adequate
investment in the operational activities such as improving the sales, production as well as focuses
over enhancing the efficiency of workforce. In context with Chen, Dong and Gu, (2016), thus,
such earning management will help the managers to make balance between the operational
activities such as increasing the income as well as reducing the expenses. Hence, it can be said
that there is need to make the proper analysis of the operational activities of the firm as well as
monitor the revenue gathering by such operational activities.
CONCLUSION
In consideration with the above listed report it can be said that there has been use of
various kinds of operating tools and techniques which in turn helps the managers in the firm to
make the proper assumption over requirements of fund as well as earnings of the company.
Hence, there has been critical overview of the constraint on the governance of the evidences
which must reflects the true and authenticated data. However, it can be said that there is need to
monitor the transactions of the business such as capital gathering, investments as well as revenue
earned through various sources. Further, it can be said that auditors of the organisation must be
concerned about what they are disclosing and presenting in such financial reports.
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REFERENCES
Books and Journals
Barth, M. E. and et.al., 2016. Bank earnings and regulatory capital management using available
for sale securities.
Bratten, B., Payne, J. L. and Thomas, W. B., 2016. Earnings Management: Do Firms Play
“Follow the Leader”?. Contemporary Accounting Research. 33(2). pp.616-643.
Bratten, B., Payne, J. L. and Thomas, W. B., 2016. Earnings Management: Do Firms Play
“Follow the Leader”?. Contemporary Accounting Research. 33(2). pp.616-643.
Capkun, V., Collins, D. and Jeanjean, T., 2016. The effect of IAS/IFRS adoption on earnings
management (smoothing): a closer look at competing explanations. Journal of Accounting
and Public Policy. 35(4). pp.352-394.
Chen, Z., Dong, G. N. and Gu, M., 2016. The Causal Effects of Margin Trading and Short
Selling on Earnings Management: A Natural Experiment from China.
Cohen, D. A. and et.al., 2016. Measuring real activity management.
Collins, D. W., Pungaliya, R. S. and Vijh, A. M., 2016. The effects of firm growth and model
specification choices on tests of earnings management in quarterly settings. The
Accounting Review. 92(2). pp.69-100.
Commerford, B. P. and et.al., 2016. Auditor sensitivity to real earnings management: An
experimental investigation.
Dichev, I. and et.al., 2016. The misrepresentation of earnings. Financial Analysts Journal. 72(1).
pp.22-35.
Dinh, T., Kang, H. and Schultze, W., 2016. Capitalizing research & development: Signaling or
earnings management?. European Accounting Review. 25(2). pp.373-401.
Dou, Y., Khan, M. and Zou, Y., 2016. Labor unemployment insurance and earnings
management. Journal of Accounting and Economics. 61(1). pp.166-184.
Fleming, Q. W. and Koppelman, J. M., 2016, December. Earned value project management.
Project Management Institute.
Irani, R. M. and Oesch, D., 2016. Analyst coverage and real earnings management: Quasi-
experimental evidence. Journal of Financial and Quantitative Analysis. 51(2). pp.589-627.
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Rathke, A. A. T. and et.al., 2016. International financial reporting standards and earnings
management in Latin America. Revista de Administração Contemporânea. 20(3). pp.368-
388.
Xue, S. and Hong, Y., 2016. Earnings management, corporate governance and expense
stickiness. China Journal of Accounting Research. 9(1). pp.41-58.
PDF
Earnings Management. 2017. [PDF]. Available through
:<https://www.cengage.com/resource_uploads/downloads/032459237X_174365.pdf>.
Techniques, Motives and Controls of Earnings Management. 2013. [PDF]. Available
through :<https://www.jitbm.com/11th%20Volume/rehman.pdf>.
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