Earnings Management and Executive Compensation
UNIVERSITY OF GHANA BUSINESS SCHOOL
MBA: ACCOUTING THEORY 1 – (ADMN 631)
LECTURE: JAMES KWAME OTIEKU
A PRESENTATION ON
EARNINGS MANAGEMENT AND EXECUTIVE COMPENSATION
BY
EMMANUEL MENSAH
ID NO: 10328957
AND
PETER OPATA NYAKO
ID NO: 10329653
1st October 2009
EARNINGS MANAGEMENT AND EXECUTIVE COMPENSATION
Introduction
Accounting standards define the accounting language that management uses to communicate with the firm’s external stakeholders. By creating a framework that independent auditors and the Securities and Exchange Commission (SEC) can enforce, accounting standards can provide a relatively low-cost and credible means for corporate managers to report information on their firms’ performance to external capital providers and other stakeholders. Ideally, financial reporting therefore helps the best-performing firms in the economy to distinguish themselves from poor performers and facilitates efficient resource allocation and stewardship decisions by stakeholders.
If financial reports are to convey managers’ information on their firms’ performance, standards must permit managers to exercise judgment in financial reporting. Managers can then use their knowledge about the business and its opportunities to select reporting methods, estimates, and disclosures that match the firms’ business economics, potentially increasing the value of accounting as a form of communication. However, because auditing is imperfect, management’s use of judgment also creates opportunities for “earnings management,” in which managers choose reporting methods and estimates that do not accurately reflect their firms’ underlying economics.
What is Earnings Management?
Earnings management has received several interpretations by many authors some of whom allude fraud to its application while others claim it is a legitimate exercise so long as the Generally Accepted Accounting Principles (GAAP) are not breached. The Statement on Auditing Standards
MBA: ACCOUTING THEORY 1 – (ADMN 631)
LECTURE: JAMES KWAME OTIEKU
A PRESENTATION ON
EARNINGS MANAGEMENT AND EXECUTIVE COMPENSATION
BY
EMMANUEL MENSAH
ID NO: 10328957
AND
PETER OPATA NYAKO
ID NO: 10329653
1st October 2009
EARNINGS MANAGEMENT AND EXECUTIVE COMPENSATION
Introduction
Accounting standards define the accounting language that management uses to communicate with the firm’s external stakeholders. By creating a framework that independent auditors and the Securities and Exchange Commission (SEC) can enforce, accounting standards can provide a relatively low-cost and credible means for corporate managers to report information on their firms’ performance to external capital providers and other stakeholders. Ideally, financial reporting therefore helps the best-performing firms in the economy to distinguish themselves from poor performers and facilitates efficient resource allocation and stewardship decisions by stakeholders.
If financial reports are to convey managers’ information on their firms’ performance, standards must permit managers to exercise judgment in financial reporting. Managers can then use their knowledge about the business and its opportunities to select reporting methods, estimates, and disclosures that match the firms’ business economics, potentially increasing the value of accounting as a form of communication. However, because auditing is imperfect, management’s use of judgment also creates opportunities for “earnings management,” in which managers choose reporting methods and estimates that do not accurately reflect their firms’ underlying economics.
What is Earnings Management?
Earnings management has received several interpretations by many authors some of whom allude fraud to its application while others claim it is a legitimate exercise so long as the Generally Accepted Accounting Principles (GAAP) are not breached. The Statement on Auditing Standards