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

? Earnings Management: The Continuum from Legitimacy to Fraud Earning management entails legal management decision makingand reporting that is aimed at attaining stable and predictable financial results. Earning management is often considered materially misleading and thus a fraudulent activity. This results due to manipulation of company’s f financial earnings either directly or through indirect accounting methods. The manipulations occur when the given management of a firm is unable to meet its investor’s expectations or wants to entice the public and other investors to invest in the company. Managers are sometimes faced with the dilemma of financial reporting and may engage in fraudulent manipulation of accounts to foster their interests. This paper is an annotated bibliography of qualitative research on earnings management continuum from legitimacy to fraud. Key words: earnings, fraud and management. Introduction 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 positive perception (Berth and Taylor, 2010). Managers engage in financial reporting fraud instead of the legitimate earnings management. There is significant amount of research that point to fraud in the financial reporting. Many managers engage in the unethical behavior of account manipulations to suit their interests or depict false perception on the performance of the company they are managing. Using the institutional approach design, Tyco a limited company under the management of Dennis Kozlowski was identified and studied. The study showed that there was fraud in the earnings management of the company during his era. Due to a lot of pressure to manage earnings especially when presenting financial report to prospective investors, it is easy to slip from common and legal forms of earnings management to illegal manipulations which are considered fraudulent financial reporting. According to Anthony (2002), managers engage in the manipulations of accounts to conceal losses, expenses and other bad financial news. The following is an annotated bibliography on earnings manipulation continuum from legitimacy to fraud. Annotated Bibliography Anthony, B. (2002). The Rise and Fall of Dennis Kozlowski: How did he become so unhinged by Greed? A revealing look at the man behind the Tyco Scandal. Businessweek. This article seeks to point the extend of earnings management slip from legitimacy to fraud. The article focuses on the case Tyco scandal under the management of Dennis Kozlowski. In the article Anthony discusses how Kozlowski rose through the ranks of Tyco Company and the growth strategy he brought to the company. 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. Most of this growth was due to a series of acquisitions that took Tyco into a diverse range of unrelated businesses. Kozlowski was initially lauded in the business press as a great manager who bought undervalued assets and then enhanced their value by imposing tight financial controls at the acquired companies. Certainly both profits and the stock price advanced at a healthy clip during much of the 1990s in his stewardship (Anthony, 2002). The article explores the reasons behind his success in the company and the earnings management which created the false perception to the investors which led to company acquisitions and mergers. The expansion through the mergers resulted to revenue growth and Kozlowski swindled a lot of cash from the company for his personal benefits. Through the article we get to understand ethical issues affecting the behaviors of managers as the case of Kozlowski. Barth, M., and Taylor, D. (2010). In defense of fair value: Weighing the evidence on earnings management and asset securitizations. Journal of Accounting and Economics, 5 (3). This article by Barth and Taylor discusses how earning manipulations occur in companies. Qualitatively the article points to various reasons for the manipulations of accounts by managers. According to the article 8-12% of companies with small pre-managed earnings decreases manipulate earnings to achieve earnings increases and 30-44% of companies with small pre-managed losses manage earnings to create positive perception (Berth and Taylor, 2010). The article points to the extent of earnings management among selected companies and the tendency for the managers to slip from the legal aspect of the earnings management to fraudulent account to manipulations. Beneish, M. D. (1999). Detecting Earnings Manipulation. Issues in Accounting Education. Beneish discuses the ethical factors leading to earnings management in this article. The article tackles various qualitative studies that point to likely causes for companies and managers engaging in management earnings. According to Beneish (1999), the desire of the given entity to associate with success is the leading factor for earnings manipulations. Managers also engage in the vice due to individual needs as was the case Kozlowski in Tyco ltd. Mohanram, P., and Bartov, E. (2004). Private information, earnings manipulations, and executive stock-option exercise. The Accounting Review. This article discusses the reasons as to why managers are likely to engage in earnings manipulations. The article focuses on interviews carried with managers picked from different companies and interviewed privately on the personal perceptions which could lead to earning manipulation. Shawver, T., and Clements, L.H. (2012). How do emotions Affect Ethical Evaluations for Accountants? Journal of forensic and investigative Accounting, 4 (1). The article is an analysis of effects of emotions among accountants on the ethical evaluations of firms. In relation to earnings management slip from legitimacy to fraud the article explores personal emotions and their effects on evaluations of financial worth of firms they work for. Conclusion From the above annotated bibliography it is evident that there is slip of earnings management from legitimacy to fraud among mangers. The slip is due to various reasons most of them being individual perceptions. The bibliographies are all focusing on qualitative researches done on the topic. With these facts of the slip there is need for more researches on how to mitigate the problem. Read More