Earnings Management: Accounting Culture, Practices, and Governance

This essay provides an in-depth analysis of earnings management in the context of accounting culture, practices, the reporting environment, and corporate governance. It begins by defining accounting practices and differentiates between cash and accrual accounting methods. The essay then delves into the meaning and nature of earnings management, categorizing it into good, bad, and ugly practices, and discusses its potential impact on a company's financial image and stakeholder perception. Furthermore, the essay identifies specific earnings management practices, such as earnings-focused decisions, biased accounting judgments, and altering accounting policies. The role of corporate governance is also examined, highlighting the importance of board structures, ethical decision-making, and the four P's of corporate governance (people, purpose, process, and performance). The essay concludes by emphasizing the significance of good corporate governance in ensuring transparency, fairness, and long-term value creation for investors and stakeholders.

Advance Financial
Analysis

Contents
INTRODUCTION...........................................................................................................................3
TASK...............................................................................................................................................3
Explain earnings management in relation to accounting culture, practices and reporting
environment and corporate governance.......................................................................................3
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
The advance financial analysis is defined as the various aspect in which the financial
position of the company can be analysed in order to know the profits and loss. There are various
types of financial analysis which is conducted within the business organisation which help the
company in making good decision (Avanceña and Prosser, 2022). The financial statement is the
record of the various aspects which includes the transactions help within the company. The
financial analysis will also include the cash budget and the flow of cash within the organisation.
It is important to maintain and analyse the aspect in order to be competitive in market and gain
profits. This impact in the performance of the business enterprise. There are various topics which
is been concerned in this report is accounting practice, explanation of earning management the
various reasons and nature of the earning management.
TASK
Explain earnings management in relation to accounting culture, practices and reporting
environment and corporate governance.
Accounting practices is a process of recording day to day business transactions of an
entity. It is the basic requirement for any business in preparing financial statement of a business
concern. There are various accounting methods from which corporates have to choose any one of
the techniques and business concern needs to abide the method. Generally Accepted Accounting
Principles (GAAP) refers to set of accounting rules, standard, procedure and principles issue by
the Financial Accounting Standards Board (FASB). It is mandatory for the companies of US to
follows these rules while computing their financial accounts (Corder and Kypridemos, 2021).
The two accounting methods which is followed by most of the organisation are Accrual
Accounting and Cash Accounting. Accounting practices facilitates in producing financial
statements of an organisation such as balance sheet, cash flow statement, statement of
stockholder equity and statement of profit and loss.
There are various methods of accounting two of them are described below:
Cash Accounting: In this type of accounting expenses and incomes are recorded as soon as it
takes place and only those transactions which are measured in monetary terms are to be recorded.
For instance, a payment made or receipt will be recorded in the books of account only when it
bills paid or payment received by the organisation.

Accrual Accounting: This accounting technique is based on the matching principle which states
that the transactions will be recorded in the books of account as soon as it is realised by the
organisation that there is an expense or incurred activity will be occurring at a future date. This
means that a transaction will be recorded irrespective of the payment, whether it is received or
paid by the organisation (GATAWA, 2021) (Hafezi Birgani, et. al., 2022).
Meaning and nature of Earning Management-
It is an accounting trick which is used by the company to make its financial statements
look better than it really is to improve the image of firm's financial status. It is the mechanism
that a firm uses to mislead its shareholders on the organisation's economic growth and financial
position. The reason for the same can be the individual's aim to acquire earnings from the
settlements with the changed financial reports. Every company's aim is to earn profit to survive
in the market. But this is not enough for the firm, a business also has to attract the investors and
creditors to make its stand for a long run in the market that is why it has to opt for earning
management technique.
The nature of Earning Management can be the good, the bad and the ugly practices-
The EM is permitted by the GAAP, but the effect of its usage is different between the
companies. Earnings management applications are said to be good, if the organisation practice it
in an ethical manner, and EM can also help the firm in improving price of a share in a business
enterprise, can also assist the company to generate sources for the future requirement of funds, to
encourage the investors and creditors for investing money in the firm and lending money to the
firm, to check the standards of the financial records, to permit the firm for obtaining the reliable
and predictable financial results without breaking any methodical regulatory requirements. A
good earning management have nothing or very little to do with the false financial recordings.
On the other hand, earning management is considered as a bad practice and when it is executed
ethically but the motive behind this was unethical motives of the management. The unethical
motives can be due to the disputes in interest and behind the employment techniques does not
provide the company with the good results (Patel, 2018).
Environmental reporting signifies an instrument for providing ecological info to the
investors. As environmental writing remains unpaid on a global scale, there are chief alterations
in terms of the superiority and amount of ecological data, reported by units from diverse
businesses and nations. In Agency theory, the firm is accountable for the conclusion to report

ecological data, decision made by the organisation in order to help the benefits of the
stakeholders, considering that for cumulative the shareholders understanding and for
manipulating the corporate behaviour, importance should be on the internal situation. Inside this
study, we have absorbed on certain issues related to the unit, such as interior features, involving
mainly in how the object is achieved, in order to classify the being of certain associations
between the features of business supremacy and the level of ecological reporting. Among the
features of corporate reign we could mention the panel structure and arrangement and the being
of ecological committees. The outcomes reveal that the freedom of the board and the being of an
ecological group have a important association with environmental reportage as far as Fuel and
Gas Refining businesses are concerned (Roy and Pal, 2019).
The nature of earnings management is said to be a bad practice when it is carried out by
the managers to be use to the one particular goal of managers. Bad EM does not necessarily
result in the overall goodness for the businesses. An earning management practice can also state
to be an ugly practice when it is accomplished by the managers unethically no matter what they
developed, whether they resulted in something beneficial and non-beneficial to the business
enterprise regardless at short – term and long – term. It has manipulative nature and the purpose
of this may be to cheat the shareholders or the entire public. Its impact for the short-term might
be beneficial but it has adverse effect for the long-term. By making the use of it with an unethical
motive an organisation may lose the price of its shares, may even get out from the listed stock
market, and it can even-lead to the winding-up of a company (Hermes, Lensink and Meesters,
2018).
Earning management practices are as follows:
 Earnings- focused decision: Decision are taken by the management by focusing on
meeting earnings estimates. It includes certain activities such as advertising, research,
staff training which can be suspended temporarily. Organisation whom have a long term
vision does not cater much in enhancing the earnings of the business concern.
 Biased Accounting Judgement: Accrual accounting presents earning opportunities for the
management which needs to be execersied when accrual accounting is execersied. A
well-developed organisation follows policies that are bias free and can be applied to the
business.

 Altering accounting policies: Management of big companies choose those accounting
policies which reflects the implicit cost factors.
Corporate Governance: Corporate governance is a system by which organisations are
controlled and directed. The responsibility of governance is in the hands of Board of directors of
an organisation. The equity shareholders are the owners of a company and the are responsible for
selecting board of directors and auditors for the business concern.
Board of Directors are the primary stakeholders of an entity whom influences corporate
governance practices. Board of Directors are elected by the shareholders and appointed by the
board members, they represent the shareholders of the company. Boards is made up from
independent member and insiders. Insiders are the major founders, executives and shareholders.
Independent directors do not share ties of insiders, they are chosen because of their talent and
experience of the members. Independents helps in governance by diluting the power and helping
the shareholders with their interest with the insiders.
Types of Bad Governance practices are as follows:
 Organisations do not cooperate with the auditors and also does not select the auditors by
proper scaling and non-compliance of documents.
 Executives compensations needs to be satisfactory in order to keep them with the
organisation it needs to be decided with the corporate officers.
 A board which is poorly structured makes it difficult for the board to effectively.
Good Corporate Governance is a set of rules that defines the relationship between
management, stakeholders and Board of Directors of the company. Four P's of Corporate
Governance includes people, performance, purpose and process.
People: It comes at first in the four P's because people exist on both the sides of business
equation. Every part of organisation is comprising of board, stakeholders, consumers and board.
The organisers of the business are the one whom determines the objective, evaluate performance,
develop a process to achieve the outcome, uses these outcomes to make future plans of the
management (Howard, Howard and Scott, 2020).
Purpose
Every corporation have a purpose for which they work. It is mentioned in the books of
memorandum of association. Every project is under taken with the view to achieve some sort or
target which is pre-defined.

Process
It is a process by which an organisation achieves its goals which were manufactured before
starting the project. Process are redefined with the time because of the changes caused by
internal or external factors which cannot be controlled by the management.
Performances
Performance analysis is one the major skills in any industry. It facilitates management to know
the actual outcome from a certain project or task. Then these findings are applied to the
organisation to improve the existing workings.
Principles of Corporate Governance are as follows:
 Structure of corporate governance may vary with according to the type of organisation, as
for every business there is choice to adopt a corporate governance model from the various
models available.
 All the stakeholders need to be treated fairly and equally. Make shareholders aware of
their rights so that they can exercise it.
 Social, legal and contractual obligations to non- shareholders needs to upholds
 The BOD are required to maintain a commitment to ensure fairness, transparency,
diversity and employees.
 Boards members needed to have adequate skills in order to review management practices.
 All policies of corporate governance are disclosed to increase the transparency of the
relevant stakeholders of the organisation.
Supremacy at a business level comprises the procedures over which a company’s purposes
are set and followed in the setting of the communal, controlling and marketplace setting. It is
worried with practices and processes for annoying to make sure that a business is run in such a
way that it attains its purposes, while safeguarding that investors can have self-assurance that
their faith in that business is well established (Huang and He, 2022). As the home of decent
supremacy, the Organization trusts that good supremacy is important as it delivers the
substructure to recover the excellence of the choices made by those who accomplish industries.
Good superiority, moral decision-making builds maintainable industries and enables them to
create long-term value more efficiently.
Responsibility of the board is to set up company’s goals, providing them leadership that
helps in achieving targets of the firm, reporting shareholders financial accounts and supervising

the management. Corporate Governance helps in finding out what the board does and how it sets
standard for the management that needs to be followed by the management. A good governance
has a higher impact on the working of the management mostly in the non-listed companies. The
business concern needs to be fundamentally strong which helps in enhancing transparency and
accounting of the business firm. It is quite confusing in context of UK corporate Governance as
it only covers the listed companies and does not have any authority on the non-listed companies.
Culture of organisation is represented by the common beliefs and concept of the
organisation to create psychological and social environment within the organisation. It helps in
distinguish the organisation from others in the market. Cultural is one the most influence on the
transparency within the organisation in the whole world. Cultural influence leads to change in
the existing accounting policies to a new accounting procedure (Hussain, 2020).
An bookkeeping information scheme as an structural component, accumulates,
categorizes, procedures, examines and connects pertinent finance-oriented, choice making info to
a business’s exterior gatherings (Reviews such as present and potential investors, federal and
state tax agencies and creditors) and internal parties (main management) Structural cultures and
subgroups are significant causes of how persons use info and information systems. By
foundation data systems in the background of the society as a larger scheme, it is likely to
understand that numerous factors are important and should be taken into account when
ascertaining information requirements and designing and implementing information systems.
An important issue in the growth and application of information systems is classifying,
understanding the connotation, standards and control within the society. Application of data
systems in the economic facilities sector wants consolidation administrative social values related
with client location, suppleness, superiority, and presentation location. Bookkeeping processes
are enormously influenced by administrative culture, which includes ethics and worth scheme in
the group. Most of the business frauds income place over manipulation of bookkeeping way, gap
dressing of books being a shared phenomenon. According to Kotler, structural culture can create
cohesion between the members and the organization as a social control in the company in the
face of information systems (Lashitew, van Tulder and Liasse, 2019).
Reporting Environment Earning management decreases the value of firm because it
decreases the quality of financial reporting. Earning management decreases the wealth of the

shareholders. A high level of corporate governance and decrease the discrepancy between the
shareholders and managers of the firm.
Corporate governance restricts the characteristics of discretionary behaviour and
activities of management. For instance, good governance can directly affect the governance of
the business.
Accounting procedure is immensely affected organisational culture which includes value
and ethics. Frauds takes place in an organisation with the manipulation in accounting procedure
or alteration in the accounting data. One of the common phenomena is window dressing of
accounting. According to Kotler, Organisational culture facilitates the firm to create cohesion
between organisation and members (Lecluyse and Spithoven, 2019).
Benefits of strong accounting culture are as follows:
A strong accounting culture is a massive benefit for any organisation and it will increase the
fever headaches. It does not sum-up with the financial aspect but it also considers other aspects
which impact the overall investing cultural of the firm.
 Attract talent: Every organisation wants talented individual in their organisation. To get
those talented individual the firm needs to stand out in the market. Organisation needs to
create a culture in which employees themselves and recruit their own talented friends and
relatives.
 Saves time and money: A strong culture leads to recruit people for the business. A
positive culture leads to keep the morale of the employees high as well as helps in
achieve huge turnovers.
 Culture: A culture of purpose, work life balance and collaboration facilitates the
employees to enjoy their work.
 Cultural helps keep client happy: It is not only beneficial for the team but it also helps in
creating a great environment for the clients. With positive cultural believes the
management will help in gathering a positive attitude towards their management
problems (Marwan, et. al., 2021).

CONCLUSION
From the above report it is concluded that advance financial analysis includes the use of the
financial statement and the calculations of the profits and loss of the company. It is very
important to analyse the financial position in order to be competitive in the market. The financial
analysis is concerned with the management and earning management is the process which is
been discussed in this report. The earning management is the use of the various accounting
techniques so that the company can produce financial statements. This helps in analysing the
current positive and negative position of the c0ompany in an effective way. The accounting
practices includes various methods of calculation of the budget and the profits and loss. The
balance sheet shows the actual position of the company. This can help in improving the
performance and manage the various resources

REFERENCES
Books and Journals
Avanceña, A.L. and Prosser, L.A., 2022. Innovations in cost-effectiveness analysis that advance
equity can expand its use in health policy. BMJ Global Health, 7(2). p.e008140.
Corder, M. and Kypridemos, C., 2021. P98 Cost-benefit analysis of advance care planning for
the end of life: a societal perspective.
GATAWA, G., 2021. The Value Relevance of Financial Metrics to Publicly Listed Firms:
Evidence from Large-, Mid-, and Small-Cap Firms Listed in NYSE and NSDAQ.
Hafezi Birgani, M., Daghighi Asli, A., Yousefi, M.G. and Mohammadi, T., 2022. Comparative
analysis of the optimum level of manufacturing capacity in advance of the construction
sector in years 2001-2018. International Journal of Nonlinear Analysis and
Applications, 13(1). pp.2579-2597.
Hermes, N., Lensink, R. and Meesters, A., 2018. Financial development and the efficiency of
microfinance institutions. In Research Handbook on Small Business Social
Responsibility. Edward Elgar Publishing.
Howard, D.M., Howard, J. and Scott, L., 2020. Experiential Learning Platforms that Advance
Students to their Careers. Medical Research Archives, 8(5).
Huang, Y. and He, H., 2022. Advance learning technique for the electricity market attack
detection. Computers & Electrical Engineering, 100. p.107865.
Hussain, A., 2020. A Critical Analysis of the Viability of Advance Pricing Agreement Regime–
The Indian Experience. Available at SSRN 3706859.
Lashitew, A.A., van Tulder, R. and Liasse, Y., 2019. Mobile phones for financial inclusion:
What explains the diffusion of mobile money innovations?. Research Policy, 48(5).
pp.1201-1215.
Lecluyse, L. and Spithoven, A., 2019. Toward a framework to advance the knowledge on science
park contribution: an analysis of science park heterogeneity. In Science and Technology
Parks and Regional Economic Development (pp. 185-209). Palgrave Macmillan, Cham.
Marwan, A., Gall, V.E., Alsahly, A. and Meschke, G., 2021. Structural forces in segmental
linings: process-oriented tunnel advance simulations vs. conventional structural
analysis. Tunnelling and Underground Space Technology, 111. p.103836.
Patel, R., 2018. Pre & post-merger financial performance: An Indian perspective. Journal of
Central Banking Theory and Practice, 7(3). pp.181-200.
Roy, B. and Pal, A.K., 2019. Selection criteria of some advance lines of sesame by the study of
correlation and path coefficient analysis. Plant Science Today, 6(3). pp.356-359.
Wambua, V.M., Waweru, K.M. and Kihoro, J.M., 2021. Influence of Loan Advance Ratio on the
Loan Performance of Deposit Taking SACCOs in Kenya. African Journal of Co-
Operative Development and Technology, 6(1). pp.18-27.
Zhao, L. and Huchzermeier, A., 2019. Managing supplier financial distress with advance
payment discount and purchase order financing. Omega, 88. pp.77-90.