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

 According to agency theory, managers may have personal goals that compete with the goal of the institution or company they are running. Due to the imperfect labor and capital markets, top managers seek to maximize their utility at the expense of the company. The need to expand rapidly and gain recognition among the top managers can lead to the manipulations (Bowie and Freeman, 1992) of accounts and give false reports to the boards of directors and the public. The managers also sometimes manipulate accounts for the sake of cushioning the company earnings.

In order to hide corrupt deals in the company, the managers are also engaged in the vice. In addition to the above, top managers are likely to manipulate the accounting to create false perceptions among the interested individuals and other firms in order to expand (Mohanram and Bartov, 2004). Research on earnings management estimate that 8-12% of companies with small pre-managed earnings decreases manipulate earnings to achieve earnings increases and 30-44 percent of companies with small pre-managed losses manage earnings to create a positive perception (Barth and Taylor, 2010).

Many managers have however engaged in financial reporting fraud instead of legitimate earnings management (Beneish, 1999). Study design. . In the institutional approach, not all the managers are willing to give out the financial information of the company hence secondary information is necessary (Neuman, 2006). The advantages of this method of study are that it ensures specific information is obtained on the company the institution being studied. The approach also covers a given time in the lifespan of the selected institution hence it is easy to identify the manager in charge of the company or institution management at the time.

In addition, the approach permits in-depth and detailed study of the selected category being studied (Patton, 2002). In this case, I am going to analyze a case study of Tyco Company. Sampling technique The sampling method used in the research was the purposive sampling in which the institution being studied was singled out due to its past record and secondary information. To settle on the company earnings management various articles touching on the management of the company under the leadership of Dennis Kozlowski were reviewed.

In addition to the articles, the information collected also contained the court proceedings and perceptions of various people including Kozlowski on the fraud he was charged with (Denzin & Lincoln, 1994). Under the leadership of Dennis Kozlowski, who became CEO of Tyco in 1990, the company’s revenues expanded from $3.1 billion to almost $40 billion.