The Continuum from Legitimacy to Fraud - Dissertation Example

 The Continuum from Legitimacy to Fraud Overview The financial statements provide adequate and important information in relation to performances as well as financial securities of a company. In the present business scenario, financial statements or audit reports play an important role for companies to present their financial performances, objectives as well as strategies in order to acquire confidence from investors and stakeholders. In this respect, earning management should be scrutinized as well as managed in an efficient manner with the intention of mitigating fraudulent practices as well as misrepresentation in the financial statements. Earning management is a procedure of presenting misrepresented financial reports with the intention of attracting more stakeholders and investors and hence, is identified as accounting fraudulent (Jara & Lopez, 2011). Literature Review Framing the Issue In simple words, earning management is a practice of fraud (Public Oversight Board, 2003). The report of Public Oversight Board (2003) signifies that earning management is a vast concept covering both legitimate as well as illegitimate actions, which are undertaken by the management of a company with the intention of modifying its earning entity. The report of Public Oversight Board (2003) also stated that earning management can be both legitimate as well as illegitimate choices of disseminating financial information. For instance, earning management is considered to be legitimate when accounting records of certain expenses in first quarter is revealed in the fourth quarter. On the other hand, illegitimate information is related to presenting of financial records in inappropriate accounting period with the intention of misguiding the investors and company stakeholders (Public Oversight Board, 2003). Earning Management and Fraud According to Kassem (2012), earning management and fraud is differentiated on the basis of principles stated in ‘Generally Accepted Accounting Principles’ (GAAP). Earning management is accepted under the principles of GAAP that signifies it as a process in accordance with which, accounts and financial statements are prepared with the objective of attracting more investments from investors and to keep stakeholders satisfied with the performance of a company. On the other hand, fraud is unaccepted under the principles of GAAP being explained as the procedure of misrepresenting data and information presented to stakeholders and investors of the company. Kassem (2012) contextually stated that earning management may be accepted under the principles of GAAP, but it may affect stock price as well as integrity of a company leading to non-transparency of financial information. As stated by Kassem (2012), management of a company may adopt earning management in providing misrepresented financial information in order to misguide stakeholders and investors during the failure of the company (Tangjitprom, 2013; Kassem, 2012). Earning Management is a form of Fraud According to Leuz, Nanda & Wysocki (2003), earning management is used by management of a company to adopt fraudulent practices for their benefits at the expense of stakeholders’, investors’ and others’ interests who are dependable on the performance of the company. In this perspective, when stakeholders and investors detect that management of a company has adopted earning management, the stakeholders are eligible to take adequate disciplinary and legal measures against the occurrence of the mismanagement (Leuz, Nanda & Wysocki, 2003). In a similar perspective, Saanoun, Riahi & Arab (2013) have stated that managers may be adopting earning management in order to obtain private benefits and revealing false financial information and reports to stakeholders and investors. Correspondingly, earning management is recognized as an unethical practice in business by stakeholders and investors, which can certainly hamper the confidence of stakeholders and investors among others to a significant extent (Saanoun, Riahi & Arab, 2013). In this regard, Prior, Surroca & Tribo (2007) have stated that earning management has mainly affected the stakeholders of a company, as the shareholders who are participating in the management operations obtain private benefits having an influence on the capital market, regulatory considerations as well as contractual agreements on a short-term basis. On the other hand, the shareholders and stakeholders who are not participating in the management operations are presented with misleading financial information about the performance of a company. Respectively, earning management is identified as a fraudulent practice affecting ethical standards and ‘Corporate Social Responsibility’ (CSR) of a company (Prior, Surroca & Tribo, 2007). Problem Statement This proposed study has been undertaken with the intention of identifying different aspects, which are related to earning management. Earning management is accepted under the standards of GAAP as a procedure of presenting financial statements or annual reports to stakeholders and investors in an attractive fashion. Where, on a positive note, this conduct can be justified to revitalize the financial stance of a company in the short-run; on a negative note, it can also be argued to reward a scope for unethical conducts by company directors On the other hand, fraud is unacceptable under GAAP. Although, earning management is accepted under GAAP, stakeholders and outside investors seek it as a process of misguiding them with misrepresented financial information in reporting financial statements. Respectively, the practice of earning management is identified as fraudulent practice, which is illegal and accordingly unethical. Earning management is also recognized to adversely affect CSR policies of a company. Research aims and objectives According to the problem statement, the aim of the research will be to determine the differences as well as connections amid earning management and fraud. The proposed research study will also reveal the positive as well as negative aspects of earning management. Correspondingly, the objectives of this proposed research study will be as follows: To understand the basic tenets of earning management To identify the dimensions of earning management To identify the differences amid earning management and fraud To determine that earning management is a path towards fraudulent act Research methodology A quantitative research study is expected to be of immense significance for this proposed study in order to obtain enhanced understanding about various contextual factors. Theoretically, a quantitative approach is regarded as a procedure of examining empirical data in relation to their scale, frequency and range among others. This approach is a structured procedure, which assists in analyzing collected data in a detailed manner. In this approach, the collected data will be analyzed with the utilization of statistical and other mathematical methods. In this proposed research study, a quantitative research approach will be obtained with the motive of ascertaining the outcomes of this study and objectives in an appropriate manner. Moreover, the quantitative research methods will assist in depicting as well as analyzing the study with various statistical graphs and tables for better understanding of the research topic (Sukamolson, 2005). With the purpose of satisfying the data requirements of the proposed study, two types of data collection procedures, which include primary data and secondary data, will be taken into account. The primary method of data collection to be implemented in this proposed study comprises interviews and surveys. In this context, interviews and surveys will be conducted on managers and stakeholders for collecting primary data in this proposed study. On the other hand, the secondary data planned to be collected from various secondary sources in this proposed study will include journals, books and other online sources (Pollack, Modzeleski & Rooney, 2008). In this proposed research study, secondary data collection approach will be adopted with the intention of obtaining information in relation to earning management from secondary sources. Furthermore, due attention will be rendered to gather secondary data is to be collected from reliable and authentic sources with the intention of executing this study in an ethical manner. Summary This proposed research will emphasize the study of earning management. Earning management is identified as a practice executed by managers to modify the financial stance of the earning entity, depicting misrepresented financial information during unsatisfactory performance of a company. In this respect, the proposed study will be executed with the aim of determining the various differences and linkages amid earning management and fraud. In the process to attain the determined aim, the proposed study will depict the dimensions and aspects of earning management. Accordingly, a quantitative research approach will be adopted on the basis of which, the data collected will be analyzed with charts and graphs. It is expected that from the findings of the proposed study, the procedure on the basis of which earning management leads to fraudulent practices can be revealed evidently. References Jara, M., & Lopez, F. J. (2011). Earnings management and contests for control: An analysis of European family firms. Journal of Centrum Cathedra 4(1), pp. 100-120. Kassem, R. (2012). Earnings management and financial reporting fraud: can external auditors spot the difference? American Journal of Business and Management 1(1), pp. 30-33. Leuz, C., Nanda, D., & Wysocki, P. D. (2003). Investor protection and earnings management: An international comparison. Journal of Financial Economics 69, pp. 505-527. Pollack, W. S., Modzeleski, W., & Rooney, G. (2008). Prior knowledge of potential school-based violence: information students learn may prevent a targeted attack. United States secret service and United States department of education, pp. 1-14. Prior, D., Surroca, J., & Tribo, J. A. (2007). Earnings management and corporate social responsibility. Working Paper 06-23, pp. 1-42. Public Oversight Board. (2003). Chapter 3 – Earnings management and fraud. Retrieved from http://www.pobauditpanel.org/downloads/chapter3.pdf Saanoun, I. B., Riahi, Y., & Arab, M. B. (2013). Private benefits of control and earnings management: The case of French listed companies. European Journal of Business and Social Sciences 2(3), pp. 121-139. Sukamolson, S. (2005). Fundamentals of quantitative research. E-journal, pp. 1-20. Tangjitprom, N. (2013). The role of corporate governance in reducing the negative effect of earnings management. International Journal of Economics and Finance 5(3), pp. 213-220. Read More