WorksheetsEarnings Management
Total questions: 5
Worksheet time: 2mins
Healy and Wahlen (1999) stated that earnings management occurs when managers use judgement 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.
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Earnings management can be defined as the process where business decisions made rely on deliberate judgments associated with the process of financial reporting with the main intention behind them being wanton deceit, concealment or data spinning thus giving rise to earnings management (Garret et al., 2020).
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Depend on real economic consequence, managements companies tend to employ different strategies for the manipulation that referred as loss maximization / minimization (Leung, 2015).
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Three main reasons why earnings management occur which are Capital Market Expectations and Valuation (Earnings Shock), Contracting Motives and Anti-trust, and Government Regulations.
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This are among other sophisticated methods in earnings management which are Off Balance Sheet reporting in subsidiaries, Synthetic Leases, Pro-forma Estimates, and Inter-company regulation.
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