EARNING MANAGEMENT

Earning Management

Earning Management

Introduction

Earning management is sometime called as the net income or the bottom line; this is one of the most important aspects of the financial statement. These statements shows to what aspect a company is found engaged in the value added activities and also shows to what extent the company has earned or lost. Through these activities the company is able to make resource allocation in the best possible manner. The company stock shows the theoretical value of the company's stock (Griffiths, 1986, Pp 12 - 31). The decrease in earnings of the company shows that the stock price will go down, while the increase in the earning results in the price increase.

As there is so much importance of it in the financial markets, so it is no surprise that the company management has got a very vital role to play. That is how these are reported in the financial statement of the company. This is the reason that every executive of the company has to understand the financial impact of his decisions. This will let the executive measure the impacts of the decision he takes. Thus in simple words earning management should be learned by every decision maker of the company.

Earning management can be defined as the reasonable and legal management decision making and reporting which is intended for achieving predictable and stable financial results for the company. Earning management cannot be considered as illegal activity by the company, since it is the gaps which are there in the International Accounting standards (Mulford and Comiskey, 2002, Pp 63 - 87). These gaps are made used off for the purpose of showing the earning of the company. These activities in the financial markets are known as the cooking the books, these are done through the use of misrepresentation of the financial statements.Discussion

Accrual Based Earning Management and Real Earning Management

The two methods of earning management are the Accrual based Earning management (AEM) and Real-Earning Management (REM). The Change in the accrual process is called as the AEM and the deviation from the normal business activity is called as the REM. Several previous researches have shown that the earning management is reduced in the area where there is a strong investor protection. AEM is responsible for misleading the investors by using various accounting methods. It also lowers the quality of earning (Torre, 2009, Pp 35 - 46). While on the other hand REM is more costly for the firm in relation to the future firm value. This is because it causes cut in the funding for Research and Development and for the marketing purposes. It causes the increase in price discount and results in the reduction of capital investment which adversely affects the future revenue of the company.

On the other hand it is very hard for the stakeholders of the company to detect the REM to the AEM. As the REM is included in the investing, operating and the financing activities. Therefore, the REM and the AEM are used ...