Activity 5 - Section 4: Identifying Research Questions and Hypotheses

Activity 5 - Section 4: Identifying Research Questions and Hypotheses

Introduction

Earning management is a strategy used by the management to deliberately manipulate earnings. However, total earned amount may match with pre determine targets and budgets. Companies usually will not permit its cash and cash equivalent to be out of balance. They always ensure that they are balanced through audit operations. Companies use earnings management to smooth out fluctuations in earnings and/or to meet stock analysts' earnings projections. Large fluctuations in income and expenses may be a normal part of a company's operations, but the changes may alarm investors who prefer to see stability and growth, tempting managers to take advantage of accounting gimmicks. Also, a company's stock price will often rise or fall after an earnings announcement, depending on whether it meets, exceeds or falls short of expectations. Management can feel pressure to manipulate the company's accounting practices and, consequently, its financial reports in order to meet these expectations and keep the company's stock price up. If earning management is considered excessive, the SEC may issue fines as a punishment, but it still can be difficult for investors to identify the companies' misrepresentations (Desai, 2005).

Research Question # 1

Do the excessive practices of Earnings Management distort the organizations image among the customers which may result in bankruptcy in future?

Hypothesis

HO: Earnings Management distorts the organizations image among the customers.

HA: Earnings Management does not distort the organizations image among the customers.

Problem Statement

The earning management practices focuses on the structural transactions in order to amend or change the financial report of the company in order to show greater profit to the stakeholder.

Purpose Statement

The purpose of this research question is to explore an idea about the customer and general public perception towards firms exercising earning management techniques.

Contribution to the Literature in the Field

In accounting, window dressing is the worst technique and unethical tool to show accounting information to interested parties. Company changes some of accounting data to impress its users. For attracting users, company can show good performance on investment or good financial position by changing depreciation and inventory method. Sometime mark to market accounting may be used for window dressing. Cash balances are measured at a point in time. This means that receipts and payments of cash can be arranged so that the cash balance is some particular amount. For example, a business may make special efforts to collect debts just before the year-end, or delay paying creditors until just after the year-end. A business may also structure transactions so that the cash balance is favorably affected. For example, if assets are acquired under leasing agreements, cash outflows are spread over several accounting periods rather than one accounting period.

However, the currently accepted idea among accountants, regulators and standard setters is that, more often, the revenue management is harmful. It deceives investors and reduces the reliability of financial reporting. Thus, a clearer understanding of revenue management is vital before any permanent discussion on the ...