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

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Earnings Management: The Continuum from Legitimacy to Fraud

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. ...
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

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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
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Summary

Earning management entails legal management decision making and reporting that is aimed at attaining stable and predictable financial results. Earning management is often considered materially misleading and thus a fraudulent activity…
Earnings Management: The Continuum from Legitimacy to Fraud
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