Earnings Management: The Continuum from Legitimacy to Fraud - Research Paper Example

Let us consider the first concept, i.e. a concept of "fraud". We can refer any attempt of deception to fraud (Shelton, Whittington, and Landsittel, 2001). When we talk about “earnings management” we always think about financial gains management of a legal entity. It is evident that in the process of this kind of operations fraud can occur (Hoffman, Kamm, Frederick, and Petry, 1996). Thus, there is a "spicy mixture" between legitimate and fraud practices in the process of earnings management.

From legitimacy to fraud in earnings management To smooth the corners, different companies are dealing with a great variety of operations to conceal real figures of income. The main goal, as a rule, is to reach a stable progressive development of financial gains of the company (Keim and Grant, 2003). On the example of famous case studies, we can restore in our memories the way Enron's accountants were subjected to the external pressure of their CEOs and stakeholders and were driven into temptation of fraud practiced in earnings management.

Shelton et al (2001) underline: fictitious transactions can cause fraud in earnings management. . Levitt was very much interested in accountant practices improvement and in his work (1998) he made an emphasis on flexible practices development and reaching the highest objective goals. He talked about a dual nature of the accountant flexible practices: on the one hand these would facilitate a process of accounting, but, on the other hand, they can lead to uncontrolled leakages of information, gaps in financial statements considerations and development etc.

Let us refer to a famous case of the Enron Company again. The accountants were too much flexible in their practices and they made concessions to their managers and authorities of the Company. In the result of their fraudulent actions Enron experienced bankruptcy. Here we can refer to the ethical issues of earnings management: the accountants should be ready for changes, but they should take into account appropriate ethical issues and take the necessary measures in case a potential hazard for the Company is identified.

Moreover, the accountants should strictly follow all rules and regulations of audit management (Statement on Auditing Standards, 2010). On the basis of this claim, we can make the following conclusion: to be open, flexible, ready for changes, but work in compliance with ethical norms and accounting norms and regulations are the necessary measures taken by the modern accountants (Trussel& Rose, 2009). A final point of continuum from fraud to legitimacy in earnings management can be referred to ethics.

Moreover, independent audit will facilitate this process and improve practices in accounting. Conclusion Earnings management requires improved practices and with respect to numerous external factors accountants can be influenced by pressures of their managers, stakeholders,