Premium Essay

Earnings Management and Ethics

In: Business and Management

Submitted By nilocool
Words 2758
Pages 12
Amans, Patrick
Hilario, Kedron
ACTG 6650
Dr. Ward
29 July 2015
“Ethics and Its Ties to Earnings Management”
INTRODUCTION
Many professionals and accounting researchers have raised the question -Is ethics directly linked to the practice of earnings management? Earnings management is defined by Beaudoin, Cianci, and Tsakumis (2012, p.507), as “the manipulation of revenues and/or expenses to obtain a desired financial reporting outcome.” He and Yang’s article offers that the definition of earnings management is “a process in which managers use judgment in financial reporting and in structuring transactions to alter financial reports to either mislead some stakeholders about the underlying economic performance of the company or to influence contractual outcomes that depend on reported accounting numbers” (He and Yang 2013). So either way one looks at it, earnings management is a form of deceit. In Shafer’s (2013, p.45) paper, the author defines ethical climate by referencing Victor and Cullen (1988) as, “the prevailing perceptions among employees of organizational practices and procedures that have ethical content.” More often than none, findings have shown that companies tend to engage in earnings management through management’s actions, and not just through accounting choices. Corporations tend to conduct earnings management to meet earnings forecasts, as well as, to decrease financing and tax costs. One side of the spectrum would argue that it is perfectly fine to manage earnings, as long as it is within the generally accepted accounting principles. Others would argue that managing earnings is unethical from any standpoint. Furthermore, some would find it okay to manage earnings if it were in the best interest of shareholders, but find it is unethical if interest lied in the hands of the manager’s wealth. It is clear that there is a fine line between what...

Similar Documents

Free Essay

The Ethics of Earnings Management

...The Ethics of Earnings Management:  The Case of Income Smoothing  James Gaa  University of Alberta  May 2007  Information Asymmetry  In Most Situations, People Do Not Have the Same  Information  Management Inevitably Has Information that Would be  Useful to Investors – and other Stakeholders  In Financial Reporting:  Information Asymmetry Follows Immediately from the  Separation of Ownership and Management May 2007  The Ethics of Earnings  Management  2  1  Corporate Transparency (OECD)  “The Corporate Governance Framework Should Ensure  that  Timely and Accurate Disclosure is made  on All Material Matters regarding the Corporation,  Including the Financial Situation, Performance, Ownership,  and Governance of the Company.”  OECD, ”Corporate Governance Principles: 2004”  May 2007  The Ethics of Earnings  Management  3  Corporate Secrecy (OECD)  “Disclosure Requirements are Not Expected to Place  Unreasonable Administrative or Cost Burdens on  Enterprises.  Nor are Companies Expected to Disclose Information that  May Endanger their Competitive Position  Unless Disclosure is Necessary  to Fully Inform the Investment Decision and  to Avoid Misleading the Investor”  OECD, ”Corporate Governance Principles: 2004” May 2007  The Ethics of Earnings  Management  4  2  Corporate Secrecy  Corporations Have Secrets  Some are Legitimate  Corporations Should be Able to Keep them secret  Trade Secrets  Other Proprietary Information ......

Words: 4111 - Pages: 17

Premium Essay

Managers' Ethical Evaluations of Earnings Management and Its Consequences

...Managers’ Ethical Evaluations of Earnings Management and Its Consequences* ERIC N. JOHNSON, University of Wyoming GARY M. FLEISCHMAN, University of Wyoming SEAN VALENTINE, University of North Dakota KENTON B. WALKER, University of Wyoming 1. Introduction and motivation The purpose of this study is to investigate, in an experimental setting, how favorable versus unfavorable organizational consequences influence managerial responses to an employee’s earnings management behavior. We focus on the following question: Do the ends of positive organizational consequences justify the means of earnings management? Earnings management is defined as ‘‘the choice by a manager of accounting policies so as to achieve specific objectives’’ (Scott 2003: 369). Earnings management can be fundamentally classified as either accounting related, involving the manipulation of accounting records through aggressive or fraudulent applications of accounting principles, or operating related, involving choices made by management regarding the timing of investment or operating activities, with the result that reported earnings are influenced by these choices (Lev 2003; Cohen, Dey, and Lys 2008; Roychowdhury 2006; Gunny 2010).1 The effect of earnings management on the value of the firm and the related issues of financial-based incentives for managing earnings has been widely examined in the accounting literature (e.g., Healy 1985; Dechow, Sloan, and Sweeney 1995, 1996; Healy and Wahlen......

Words: 9443 - Pages: 38

Premium Essay

Finacial Accounting

...Abstract This paper will analyze if the practice of earnings management through the use of deferred maintenance is ethical. The paper will analyze if the practice of earnings management through the use of deferred maintenance is allowed in the United States. This paper will analyze how United States generally accepted accounting principles (GAAP) differ in the treatment from International GAAP. Ethics is basically being able to distinguish between right and wrong. When I was in the Army, ethics was defined as simply doing what is right even when no one is looking or checking. Ethics in accounting is a form of professional ethics. The nature of the work done in accounting can affect the livelihood of all those connected to a business. Accurate and ethical accounting practices are crucial to a company. Earnings management is a process in which companies manipulate earnings to match a pre-determined target amount. The purpose is known as “income smoothing” and the intent is to keep earnings stable over a period of time (Investopedia, 2014). Practices like a company’s use of reserves for deferred maintenance are also known by the disingenuous accounting practice called cookie jar accounting or reserves (Investapedia, 2014). This practice is not ethical because it misleads investors on the company’s performance if there is not full disclosure of the company’s financial picture. In the United States, the SEC typically......

Words: 266 - Pages: 2

Premium Essay

Business Ethis

...Business ethics are a pivotal aspect in strategic business finance, or finance in general. Poor ethical practices and immoral acts have been conducted across many years by many individuals and businesses in the business world in regards to finance. This paper will focus on two of the more well-known ethical issues that occurred in the late 1990s and early 2000s, Enron Corporation and WorldCom. This paper will focus on the factors that led to the demise of the corporations, as well as the violations that occurred within the accounting practices, and the specific ethical violations in strategic financial planning. To summarize, the largest contributing factor to the demise of Enron Corporation and WorldCom was simply corporate governance failure (Stanford GSB Staff, 2016). The smaller factors that led to the governance failure were such things as increases in executive compensation and stock options, jumps to incentives to manage earnings, and major shifts in the structure of auditing firms. These changes directly led to the loss of money and public confidence. These reason can be classified as nothing other than management greed. This can be validated by the statistical increases in worker compensation which rose forty-two percent in the 1990s as well as corporate profits rose eighty-eight percent, the standard and poor index increased two hundred and forty-eight percent, as well as CEO compensation rose four hundred and sixty-three percent during this timeframe (Stanford GSB...

Words: 1426 - Pages: 6

Premium Essay

Case Study

...of earnings management. Discuss in what instances is earnings management acceptable and in what instances is it not acceptable? Earnings management is the process by which management can potentially manipulate the financial statements to represent what they wish to have happened during the period rather than what actually happened. Reasons why management may want to manage earnings include both internal and external pressures. Perhaps the most important section of this chapter is that of dealing with the common techniques used to manage earnings. It is through a thorough understanding of these methods that earnings management can be spotted. These strategies are important to know as an accountant, auditor, financial analyst, creditor, or investor. Healthy scepticism on the part of these various interests, and contributors, to the financial statements will further detection, and a reduction, of earnings management practices. By improving the quality of the information in financial statements, through better accounting standards and ethical behaviour, the cost of doing business decreases. Not only is this true with the cost of capital, as the chapter describes, but nowhere is it more clearly seen today than with the additional costs publicly traded companies are now faced with to come into compliance with the provisions of the Sarbanes-Oxley Act. Earnings management and unethical behaviour of the past is costing businesses more today. The instances of earnings management......

Words: 2873 - Pages: 12

Free Essay

Business Research Ethics

...Running head: BUSINESS RESEARCH ETHICS 1 Business Research Ethics RES 351 February 28, 2013 BUSINESS RESEARCH ETHICS 2 Business Research Ethics Before the debt crisis of 2008 exploded, one of the two American banks that backed a large portion of United States mortgages was fined in 2006 because of improper accounting practices. Ethics are a set of standards derived by individual or company ideals of what is right and wrong. Looking back, it should have been clear the poor ethics of this bank would contribute to the economic disaster that would follow. A report conducted by the Office of Federal Housing Enterprise Oversight (OFHEO) from 1998 to 2004 discovered that Fannie Mae’s senior management deliberately influenced improper accounting by swaying internal auditors resulting in undeserved large bonuses. This was accomplished without advising any stockholder or other interested parties; the rest of the world. During this time, Fannie Mae reported unfettered profit growth and reaching publicized earnings targets per share for each quarter. "The image of Fannie Mae as one of the lowest-risk and 'best in class' institutions was a façade" (Fannie mae: Unethical, 2006). During this investigation, Fannie Mae evaded the OFHEO further adding to their harsh fine levied by them and the Securities and Exchange Commission. Fannie Mae’s mismanagement, manipulation of earnings, and unhindered growth culminated in $10.6 billion in losses, “well over a billion dollars in......

Words: 1200 - Pages: 5

Premium Essay

Aicpa

... Boston Burr Ridge, IL Dubuque, IA Madison, Wl New York San Francisco St. Louis Bangkok Bogota Caracas Kuala Lumpur Lisbon London Madrid Mexico City Milan Montreal New Delhi Santiago Seoul Singapore Sydney Taipei Toronto Table of Contents Chapter 1 Integrity: The Basis for Ethics in Accounting 1 What Is Ethics? 1 Definition 1 Application of Ethical Reasoning in Accounting DigitPrint Case 33 32 Conclusion 34 Discussion Questions 34 Endnotes 36 Chapter 2 Cases 37 2 Case 2-1: A Faulty Budget 38 Case 2-2: Better Boston Beans 39 Case 2-3: Eating Time 40 Case 2-4: Is Internal Whistle-Blowing "Right"? Case 2-5: Play Ball 43 Case 2-6: Supreme Designs, Inc. 44 Case 2- 7: The City of West Buckle 46 Case 2-8: The CPA Review Course 47 Case 2-9: The Ethics ofiPod-ing 48 Case 2-10: The Tax Return 49 Distinguishing between Ethics and Morality Religious and Philosophical Foundations of Ethics 3 Teleology 4 Deontology 6 41 Acting with Integrity Personal Integrity 8 7 The Moral Point of View 7 The Six Pillars of Character.... 8 Trustworthiness 8 Respect 10 Responsibility 10 Fairness 11 Caring 11 Citizenship 12 Chapter 3 Ethical Decision Making in Business 50 What Is Business Ethics? 51 Ethical Issues in Business 51 Virtue, Character, and CPA Obligations 12 Scope and Organization of the Text 12 Conclusion 14 Discussion Questions 14 Endnotes 15 Chapter 1 Cases 17 Case 1-1: A Student s Dilemma 18 Case 1-2: Giles and Regas 19 Case 1-3: Jason Tybell 21......

Words: 1401 - Pages: 6

Premium Essay

Behavioral Aspect of Accounting: the Need to Emphasize on Ethics

...Behavioral Aspect of Accounting: The Need to Emphasize on Ethics ------------------------------------------------- Ahmad Zubair Chedi ------------------------------------------------- Abstract Accounting plays a vital role in providing information that permit economic decision, therefore the information has influence on its users. The financial statements that serve the basis for the economic decision are drawn up, not by the users, but by the enterprise’s accountants under the authority and control of the enterprise’s management. Ideally the preparers should take as their objective the fulfillment, (to the best of their ability) of the users’ needs. However the preparers have their own objectives, which often are quite different from those of the users. The financial statements can play a very important role in helping the enterprise’s management to achieve its objective. If the accounts show that the enterprise is doing well, the shareholders will be happy also the market price of the company’s shares will remain high. Since the accounts are prepared under the direction of the management there is a temptation for the management not to present the full truth about the enterprise in the financial statements, particularly when the company is doing badly. The paper examines the behavioral aspect of accounting with emphasis on the need of ethics; the methodology used is purely content analysis, using secondary data. The study reveals that unethical behavior is......

Words: 7209 - Pages: 29

Free Essay

Acc 573 Week 3 Assignment 1

...WEEK 3 ASSIGNMENT 1 ACC 573 Week 3 Assignment 1 - Financial Statement Restatement and Ethics Write a two to three (2-3) page paper in which you: 1. Assess the factors that contributed to the financial statement restatement, signifying the executive management team’s attitude toward the restatement. Suggest how the restatement may have been avoided during the initial reporting process. 2. Explain the impact to the company’s stock price when the restatement was released and to future earnings forecast, indicating whether or not you believe the impact to the stock price was justified. 3. Evaluate the restatement in terms of management’s ethical violations according to the requirements of the Sarbanes-Oxley Act, providing recommendations to management on how to avoid these problems in the future. Provide support for your recommendations. 4. Use at least two (2) quality academic resources in this assignment. Note: Wikipedia and other Websites do not quality as academic resources. 5. Activity mode aims to provide quality study notes and tutorials to the students of ACC 573 Week 3 Assignment 1 in order to ace their studies. ACC 573 WEEK 3 ASSIGNMENT 1 To purchase this visit here: http://www.activitymode.com/product/acc-573-week-3-assignment-1/ Contact us at: SUPPORT@ACTIVITYMODE.COM ACC 573 WEEK 3 ASSIGNMENT 1 ACC 573 Week 3 Assignment 1 - Financial Statement Restatement and Ethics Write a two to three (2-3) page paper in which you: 1. Assess the factors that......

Words: 1261 - Pages: 6

Premium Essay

Hcs405 Wk2

...Reporting Practices and Ethics Paper HCS405 Reporting Practices and Ethics Paper Introduction The ethics and financial reporting of a company or corporation go hand in hand. It is easy to try and find any way to be financially successful. That is why there are accounting principles, ethics, and elements utilized to help ensure that a company can stay at a high level of ethics. One article discusses how companies with high levels of ethics tend to be more successful than those that do not have a high level of ethical standard. Ethics play a large part in the financial management of a company. Elements of Financial Management The first element of financial management is planning. Planning consists of upper level management setting forth what needs to be done for a facility to come out in the ‘green’ and break even or have a profit. This plan should also have details on how to do it on top of the objectives. Planning is needed so that a company knows what it wants and the route they plan to take to get to where they want. The next element is controlling. Controlling is where upper level management does a checks and a balance by comparing past financial reports to current ones to see that the financial objectives and goals are met. This can help to narrow down exactly which departments are in need of assistance to meet their goals. If a company has kept accurate and detailed financial reports it is more likely that the company can heavily rely on these reports to......

Words: 836 - Pages: 4

Premium Essay

Assignment 1: Review of Accounting Ethics

...Assignment 1: Review of accounting ethics 1 Assignment 1: Review of Accounting Ethics By February 1, 2013 ACC 557: Financial Accounting Oleksii Morgun Strayer University at Arlington Campus School of Business Administration (M.S. Accounting Program) Assignment  1:  Review  of  Accounting  Ethics                            2     Abstract This research writing is to describe the following: 1. Given the corporate ethical breaches in recent times, assess whether or not you believe that the current business and regulatory environment is more conductive to ethical behavior. 2. Based on research, describe organization, the accounting ethical breach and the impact to the organization related to ethical breach. 3. Determine how the organizational ethical issue was detected and how management failed to create ethical environment. 4. Analyze the accounts impacted and/or accounting guidelines violated and the resulting impact to the business operation. 5. As a CFO, recommend which measures could have been taken to prevent this ethical breach and how each measure should be implemented in future. Assignment  1:  Review  of  Accounting  Ethics                            3     Before the Enron and Andersen scandals, relatively little public attention was paid to the truthfulness of financial reporting. Of course, no one believed......

Words: 1682 - Pages: 7

Premium Essay

, Financial Management of Health Care Organizations and Ethics Are an Important Part of Running a Health-Care Facility.

...me knocked-out most of the day. Please remember that I’m given extra time on assignments via the Kaplan University office of student disabilities. Abstract This term paper for unit two review three articles, Ethics Consultation in United States Hospitals This term paper also defines 8 financial terms. Keywords: Balance sheet, Shareholder Equity, EBITDA, EBITDAM, Financial Ethics, Financial Benchmarking, Financial Trend Analysis, and Ratio Analysis. Unit 2 Term Paper Business ethics is the appropriate business guidelines and customs regarding debatable issues, like the way a CEO runs his company, illegal stock trading, corruption, business social and monetary obligations. The government’s authorities frequently enforce business ethics, still there are times when businesses alone will use a straightforward structure that organizations can abide by so that they simply may benefit the public interest (investopedia.com, 2013). Article Review The first article chosen for this assignment, is Betsy Gallup’s article Ethics Are an Important Part of Running a Health-Care Facility, and she explains ethics as having three components: independence, integrity and objectivity (2009). The article continues by explaining ethics in the healthcare sector; as patients’ at a healthcare facility or hospital we expect to receive fair and ethical care from the facilities medical professionals attending to us. One expects the same ethical......

Words: 1921 - Pages: 8

Premium Essay

Ethics in Accounting

...Sustainability and Ethics in Accounting : Waste Management Inc. Accounting Fraud The Business Dictionary defines "ethics" as the basic concepts and fundamental principles of decent human conduct. Most definitions agree with this one ; however, these principles are subject to personal and societal points of view that might differ depending on the context and individuals. Due to this subjectivity, codes of conduct have been created to ensure the application of discipline and morality not only personally but also profesionally. In the world of business, the decency of businessmen is constantly questioned as a result of worldwide scandals that have highlighted the lack of ethical standards and the breach of codes of conducts in numerous corporations. Specifically, accountants are often accused of poor financial management and fraud. Among the different cases of accounting malpractice, the Waste Management Inc. hoax is one of the most famous ones and it is usually used as an example to illustrate the decay of values in some of the biggest, most powerful entreprises. In 1968, Waste Management Inc. was founded by entrepreneurs Wayne Huizenga, Dean Buntrock and Larry Beck to provide waste and environmental services such as recycling, hazardous material collection, hauling, treatment and disposal of garbage. The company owns 26,000 collection and transfer vehicles and along with its competitor Republic Services, Inc. it handles more than half of the trash collection in the......

Words: 1080 - Pages: 5

Premium Essay

Earning Management

...Earning management is good or not? Introdcution This essay is to examine whether earning management is it good or bad. Though there is so many debate about whether it should be accepted to be good rather than bad, however, this essay will explain the both side of earnings management. Earnings management reduces the quality of financial reporting, it can interfere with the resource allocation in the economy and can bring adverse consequences to the financial market. This essay analyses both, causes and motives of earnings management as well as possible remedies. Therefore, it is not surprising that market participants, legislators, regulators, and academics are concerned with the need to control financial reporting abuses. The following paper will demonstrate how the effect to the good side and the bad side of it and outline the reason for the impact to appreciate the good and the bad of earnings management. Identify what is key driver of motivation either an earning management is good or bad. This will enable us to analyse the good and bad side nature of the earning management. BODY Good Side of Earning Management There is definitely a good side of earning management if it is properly practice for the benefits of the companies prior to achieving the key performance objective of the companies. Good earnings management means ―reasonable and proper practices. ―Accounting Subjectivity and Earnings Management: A Preparer Perspective‖ referred by Parfet (2000)......

Words: 1173 - Pages: 5

Premium Essay

Enron Failure of Leadership

...Assignment: Background Read the following Case Scenario and then attempt this task Enron: How the Failure of Leadership, Culture, and Unethical Behavior Brought a Giant to its Knees Background A company with humble beginnings, Enron began as a merger of two Houston pipeline companies in 1985. Although Enron faced a number of financially difficult years, the deregulation of the electrical power markets took effect in 1988, and the company redefined its business from "energy delivery" to "energy broker." Enron quickly changed from a surviving company to a thriving one. Deregulation allowed Enron to become a matchmaker in the power industry, bringing buyers and sellers together. Enron profited from the exchanges, generating revenue from the difference between the buying and selling prices. Deregulation allowed Enron to be creative—for the first time, a company that had been required to operate within the lines could innovate and test limits. Over time, Enron's contracts became increasingly diverse and significantly more complex. Customers could insure themselves against all sorts of eventualities—such as a rise or fall in interest rates, a change in the weather, or a customer's inability to pay. By the end, the volume of such financial contracts far outstripped the volume of contracts to deliver actual commodities, and Enron was employing a small army of Ph.D.s in mathematics, physics, and economics to help manage its risk. As Enron's products and services evolved, so......

Words: 6914 - Pages: 28