Earning Management Practice - Essay Example

Earning management refers to a common practice by many accountants and companies to manage recorded earnings.

This is because, by definition, ethics entails the discernment of what is right and what is wrong. In this light, ethical behaviors encompass all the activities that are right regardless of what is the general perception or who is observing. This means that when an activity is wrong, even when it is not recognized or even suspected, it is unethical. By deferring maintenance, activities such as repairs and payment of dues are postponed so that the company may meet its budgetary expectations and reduce costs to paint a positive financial picture to investors and stakeholders.

In addition, a key defense in financial management is full disclosure. This implies that if all the information available for positional analysis of a company is available and true, analysts can provide timely and effective advisory information for a company. However, when a company decides to provide fraudulent information to gain investors’ preference and stakeholders' favor, the companies end up being overwhelmed with deceptive information and at last lose the very thing they have been fighting to win (Temte, 2005). To increase the quality of financial reporting and hence the credibility of the information contained therein, there must be some ethical consideration. This implies that it is unethical for any company to intentionally and inappropriately conceal information that would change the financial image of a company. 

Further, honesty has always been considered the best policy, especially in business. Companies that undertake earning management are doing nothing less than dishonesty. The use of deferring maintenance to post a positive image does not mean that the deferred activities are not to be undertaken. What happens is that the deferred activities will in the long run cost the company a fortune (Vataliya, 2009). And since the company made investors and analysts believe that it is doing well financially through fraudulent data, then the company loses all that it has sought to save. The investors and stakeholders, therefore, feel deceived and that a company they have depended on has been dishonest.

Deferred maintenance in the United States is considered legal and acceptable. This is even clear from how the US government has been conducting its activities. Throughout the years, the government has repeatedly deferred repairs and maintenance costs to other fiscal years to ensure that the planned expenses fit within the budgetary allocation. This has reduced expenses in some years while erroneously increasing them and overburdening the following years and government regimes. The US GAAP, therefore, is found to be fully in support of deferred maintenance as a method of earning management (Vataliya, 2009). Companies in the country find this easy to undertake and even go the extra mile to fraudulently produce financial reports to fit within a desirable position that will attract investors and satisfy stakeholders.

In the world of economics and accounting, regulations and the determination of acceptable strategies and practices have been going on. However, despite having a general directive on the practices, some countries have been using their systems to manage the same hence leading to inconsistency especially when some differences between the local and international standards differ. The United States of America is one country that has retained its system despite having an international version of the same which in some processes differs from the local system.

US GAAP allows earning management in two main ways. First, the system permits businesses and companies to make reports of their combined earned and unearned income. Companies can, therefore, provide statements that indicate earnings that are far much higher than what has been earned. This implies that with a desire to attract investors and stakeholders, companies end up posting fraudulent reports. Competition within companies, therefore, becomes fraud related. The second way through which earnings are managed is the deference of maintenance (Murthy, 2009). Businesses are allowed to withhold crucial maintenance and repair activities for sometimes to allow earnings and flow of income to stabilize. This is even practiced at the level of the government itself.

The US GAAP differs from the International GAAP in various aspects, especially under earnings management. First, the US GAAP encourages fraudulent earnings posting, analysis, and even prediction (Murthy, 2009). This adversely affects the quality of accounting information that is obtained under this system. When companies and businesses are allowed to post earnings that are unreal and non-existence, the mere need for accounting is negatively impacted. Companies that follow the US GAAP system to manage their accounts, therefore, find it hard to get their reports acceptable to the rest of the world. It is conventionally accepted that earnings that are true and less managed are more acceptable. The companies that have minimal earning manipulation have higher value relevance and are thus of higher quality (Barth, Landsman, Lang, & Williams, 2007). Read More