The Continuum from Legitimacy to Fraud - Research Paper Example

This essay demonstrates that different improvements and various practices should be involved in the process of earnings management. Financial reporting can be influenced by numerous factors and even a personal impact can be very important trigger when fraud occurs. A lack of motivation from the company can lead managers and accountants to fraud. Concealment is one of many possible strategies implemented in the process of auditing. It can be claimed that the following four parties are key determinants of internal and external concept development of legal and fraudulent earnings management: boards of the directors, stakeholders, managers, and auditors.

It is possible to describe their mutual relations in the following way: stakeholders make boards of directors write invented figures in their financial statements, managers are subjected to the orders of the company's authorities and auditors are cheated when all these actions are combined. This paper makes a conclusion that thus, financial statement looks like Pandora's Box and different vices come out of it by voluntary actions of directors, accountants, and managers. Moreover, the two basic pillars would make earnings management fair and stable: flexibility and inviolability.

In addition, It can be also supposed that any modern company can be influenced by changing the environment, politics of the county, national or local influences etc. Thus, ethical issues are integrative elements of legitimate practices in earnings management.. With respect to the study conducted by Levitt in 1998, accountants should develop more flexible practices, but the highest standards of objectivity. Fraud in management practices can be illustrated by numerous examples, such as a famous case of fraud experienced by the Enron Company (Hoffman et al, 1996).

Accountants of the company were not afraid of providing their financial statements. The company experienced bankruptcy and a great impact was made on the employees of the company, retired employees and their pensions and many other people, who suffered huge financial losses. The following conditions are the most relevant to the earnings management conduct: “remaining alert, through observation and making inquiries as necessary, for evidence of noncompliance with relevant ethical requirements by members of the engagement team, determining the appropriate action if matters come to the engagement partner's attention that indicate that members of the engagement team have not complied with relevant ethical requirements, and forming a conclusion on compliance with independence requirements that apply to the audit engagement” (Statement on Auditing Standards, 2010).

The words and word combinations in italics can be considered as triple conditions for fair and successful earnings management. To reveal fraud in earnings management relevant ethical requirements, the appropriate action and independence requirements should be followed by the auditors. Otherwise auditing will fail and the company will be subjected to a spoiled goodwill, suspicion of stakeholders or even bankruptcy (Statement on Auditing Standards Overall Objectives of the Independent Auditor, 2010).

Conclusion Different improvements and various practices should be involved in the process of