Earnings Management, in Exchange Listed Companies, Is Not Fraud but a Case of Caveat Emptor for Investors
INTERNATIONAL UNIVERSITY COLLEGE
Sofia
“Earnings management, in exchange listed companies, is not fraud but a case of caveat emptor for investors”
Coursework in BUSINESS FINANCIAL CRIME
Student registration No: 479866
Program: International Finance and Trade, Level 2
Lecturer: A. Paparizov
“Earnings management, in exchange listed companies, is not fraud but a case of caveat emptor for investors”
With the development of the stock markets and the huge grow in the volume of money traded in them, over the past 20 years a rising attention has been aimed at towards the importance of truthful and fair accounting. The real interest in how companies chase their financial reporting has developed in the wake of a multitude of large corporate scandals that has occurred worldwide. Two of the best known examples so far for significant manipulation of accounting data and the consequences thereof are the collapses of Enron and World Com.
But now, before I continue with these two cases and concentrate in the matter of the false or “not so true and fair accounting” will focus on what is the definition of earning management, and what drives the CEO’s of these corporations to pursue the earning management style of working.
The speed at which worldwide business and trade are growing has given new characteristic to the multi-functional roles managers are forced to play. Nowadays the majority of Managers of the “blue chips” companies are more than well paid, experienced speculators. Criticism all over the world has been raised suggesting that style of management executed by those CEO’s in which the performance of the company is measured not by the output of production, neither by the satisfaction of its customers, but by the boost of its financial accounting numbers, creates incentives for the managers to act in opportunistic manners at the cost of the corporation shareholders.
“Newly appointed CEOs manipulate earnings in order to boost their salaries and to give
Sofia
“Earnings management, in exchange listed companies, is not fraud but a case of caveat emptor for investors”
Coursework in BUSINESS FINANCIAL CRIME
Student registration No: 479866
Program: International Finance and Trade, Level 2
Lecturer: A. Paparizov
“Earnings management, in exchange listed companies, is not fraud but a case of caveat emptor for investors”
With the development of the stock markets and the huge grow in the volume of money traded in them, over the past 20 years a rising attention has been aimed at towards the importance of truthful and fair accounting. The real interest in how companies chase their financial reporting has developed in the wake of a multitude of large corporate scandals that has occurred worldwide. Two of the best known examples so far for significant manipulation of accounting data and the consequences thereof are the collapses of Enron and World Com.
But now, before I continue with these two cases and concentrate in the matter of the false or “not so true and fair accounting” will focus on what is the definition of earning management, and what drives the CEO’s of these corporations to pursue the earning management style of working.
The speed at which worldwide business and trade are growing has given new characteristic to the multi-functional roles managers are forced to play. Nowadays the majority of Managers of the “blue chips” companies are more than well paid, experienced speculators. Criticism all over the world has been raised suggesting that style of management executed by those CEO’s in which the performance of the company is measured not by the output of production, neither by the satisfaction of its customers, but by the boost of its financial accounting numbers, creates incentives for the managers to act in opportunistic manners at the cost of the corporation shareholders.
“Newly appointed CEOs manipulate earnings in order to boost their salaries and to give
Bibliography: 1. Uppdrag granskning, ”Så gjorde vi reportaget om direktörslönerna del 2”, 2006-03-31 2 3. Merchant, K. A. and Rockness, J. (1994) “The Ethics of Managing Earnings: an Empirical Investigation”, Journal of Accounting and Public Policy, Volume 13, p79-94. 4. Ronen, J. and Sadan, S. (1981) “Smoothing Income Numbers: Objectives, Means and Implications” Reading, MA: Addison-Wesle 5. Healy, P. M. and Wahlen, J. M. (1999) “A Review of the Earnings Management Literature and Its Implications for Standard Setting”, Accounting Horizons, Volume 13, p365-383. 6. Unknonw. (2006). Q&A: The Enron case. Available: http://news.bbc.co.uk/2/hi/business/3398913.stm. Last accessed 09.01.2011. 7. Merchant, K. A. (1990) “The Effects of Financial Controls on Data Manipulation and Management Myopia”, Accounting, Organizations and Society, Volume 15, Nr 4, p297–313. 9. Ewert, R., Wagenhofer, A., 2005. Economic effects of tightening accounting standards to restrict earnings management. The Accounting Review 80, 1101-1124. 10. Street, D. L., Linthicum, C. L., 2007. IFRS in the U.S.: It may come sooner than you think: A commentary. Journal of International Accounting Research 6, xi-xvii. 11. Ball, R., Kothari, S. P., Robin, A., 2000. The effect of international institutional factors on properties of accounting earnings. Journal of Accounting and Economics 29, 1-51. [ 4 ]. Ronen & Yaari, 2005 3 Merchant & Rockness (1994) [ 5 ]. 4 Ronen & Sadan (1981) [ 6 ] [ 10 ]. (Street and Linthicum, 2007).