Earnings Management - the Continuum from Legitimacy to Fraud - Annotated Bibliography Example

Annotated Bibliography Earnings Management: The Continuum between Legitimacy and Fraud Bochner, S., & Clark, D. (2009). Securities Disclosure: When is Managing to a Forecast Illegal “Earnings Management.” The Corporate and Securities Law Advisor, Vol. 22(5). Pp. 1-5. Bochner, a corporate and securities partner, and Clark, a securities litigation partner, discuss the line that separates legitimate management and illegal earnings manipulation in the corporate sector. The paper discusses the fact that there is a very small distinction between legitimate management practices that are aimed at meeting financial forecasts and fraudulent activities. The paper goes on to state that, in some instances, managing earnings to conform to forecasts is not illegal is the accompanying accounting and disclosure rules are followed. The authors then go on to discuss the instances where the line between legitimacy and fraud might be crossed in earnings management, which is also a discussion of the continuum between legitimacy and fraud. Since management of forecasts is an important part of forecasts, some accountants and managers sometimes fail to distinguish between the legal and fraudulent. Chen, C., Huang, S., & Fan, H. (2012). Complementary Association between Real Activities and Accruals-Based Manipulation In Earnings Reporting. Journal of Economic Policy Reform, Vol. 15(2). Pp. 93-108. The authors cite previous studies that developed a relationship between real activities and accrual-based earnings. This study aims to capture the indicators of manager’s behaviors in boosting or suppressing earnings, so as to determine whether real activities or accrual base earnings are the main motivator of earnings management. In this case, the authors studied Taiwanese firms in finding the relationship between real activities and discretionary accruals in the firm. The authors conclude that managers of many firms use these two tools to manipulate earnings or as a strategic factor in making reporting decisions. The real activities in a firm and the accruals-based management factors play important roles in earnings management, and sometimes dictate the line between fraud and legitimate earnings management in a given firm. Gavious, I., Segev, E. & Yosef, R. (2012). Female Directors and Earnings Management in High-Technology Firms. Pacific Accounting Review, Vol. 24(1). Pp. 4-32. Gavious and Yosef, Professors of Management, and Segev, the Department of Social Work specialist, wrote this paper to try to explain the effect of the presence of female members in the board of directors and the audit committee. This study was aimed at finding the relation between female directors and the continuum between legitimacy and fraud in earnings management. The study indicates that there is a negative relation between the presence of female directors and earnings management, and that there is always a higher firm value when female representation is higher in higher positions of a firm. The authors quote the moral values of the different genders in supporting this argument, social stereotypes and the women’s motivation and sense of achievement. Ho, J. L., Liu, C. & Ouyang, B. (2012). Bloated Balance Sheet, Earnings Management, and Forecast Guidance. Review of Accounting and Finance, Vol. 11(2). Pp. 120-140. In this paper, the authors, all of them being Professors of Accounting, try to postulate Barton and Simko’s argument that balance sheet information usually acts as a constraint on accrual-based earnings management in a firm. The authors do this by examining the effect of the balance sheet constraint on the manager’s tendency to use either downward forecast or earnings management to avoid downfalls in earnings. The authors find that in cases where the operating assets are higher than average sales, the analyst is likely to provide downward trends of forecasts. In contrast, in cases where there is abnormal increase in production costs and reduction in expenses, the analyst is likely to engage in legal earnings management. This paper explains some of the differences between legitimacy and fraud by focusing on the behavior of an analyst when faced with different factors in the firm. Höglund, H. (2012). Detecting earnings management with neural networks. Expert Systems with Applications, Vol. 39(10). Pp. 9564-9570. Most research into earnings management indicates that earnings are managed through accrual-based management. In this case, most suggestions into systems to be used to detect earnings management and fraud are targeted at accrual-based earnings. However, the abilities of these models in detecting earnings management have been continually disputed. In this case, the author proposes the use of neural networks to detect earnings management. The author states that the failure of current models is in their use of linearity; therefore, the author proposes the use of neural networks that work on different levels. This is because the accrual process has been proven to be non-linear. The study indicated in this paper determines whether neural non-linear network work better than linear based models that are used to detect earnings management. Jouber, H. & Fakhfakh, H. (2011). Earnings Management and Board Oversight: An International Comparison. Managerial Auditing Journal, Vol. 27(1). Pp. 66-86. The authors are both members of the faculty of economics in the University of Sfax, Tunisia, and the aim of this paper is to investigate the relationship between the characteristic of the board and the quality of earnings management in the international context. The authors use the boards in two different countries, France and Canada, to conduct their research, and in this case, try to find the factors that dictate management discretion in the board. The authors determine that CEO ownership in both countries and independent monitoring usually determine the quality of earnings management in the firm. However, according to the authors, leadership structure and the size of the board are negative determinants of earnings management in the two countries. Kalbers, L. (2009). Fraudulent Financial Reporting, Corporate Governance and Ethics: 1987-2007. Review of Accounting and Finance, Vol. 8(2). Pp. 187-209. The author, a Professor of Accounting at the Loyola Marymount University in California, reviews and critiques the research on earnings management, fraud, corporate governance and ethics. In this case, the paper provides a history of the events concerning earnings management and financial reporting between 1987 and 2007. The author discuses the influence of corporate governance and ethics on the quality of earnings management, after which he provides recommendations for future research and financial reporting. From the conclusion, it is evident that academic research into earnings management has narrowed in scope to focus on important issues and problems in the sector. The author states that this paper is important for regulators and policy makers in the identification of problematic areas in earnings management. Lin, W., & Rong, M. (2012). Impacts of Other Comprehensive Income Disclosure on Earnings Management. Nankai Business Review International, Vol. 3(1). Pp. 93-101. Lin and Rong, both being Professors of Economics, try to verify whether the disclosure of other comprehensive income in the statement of financial performance improves the transparency in corporate performance and financial reporting. This is aimed at finding out whether earnings management is reduced by an increased tendency to report other comprehensive income. The authors find that the reporting of other comprehensive income by a firm plays an important factor in earnings management, in that it curbs earnings management and gives the public a better picture of a firm’s performance. This indicates that extensive disclosure in any firm plays an important role in reducing fraudulent activities, therefore, increasing the credibility of the financial reports prepared by the firm. This is an important factor for this research since it identifies a way of reducing earnings management. Rasha, K. (2012). Earnings Management and Financial Reporting Fraud: Can External Auditors Spot the Difference. American Journal of Business and Management. Vol. 1(1). Pp. 30-33. The author, Rasha, proposes to increase auditor’s knowledge about earnings management and help in distinguishing between management and fraud. This paper suggests that the main driver in illegal earnings management is the motive of management, which is the main factor that auditors should investigate. The author defines the difference between fraud and proper earnings management and the work of the auditor in differentiating between them. In this case, the author suggests that external auditors should adopt a new approach in detecting fraud, that of auditing the motives of management in every financial report. This would help in determining whether the earnings management is geared towards the illegal. The paper also recommends a set of actions for standards setters if the motives of management are to be determined and determine the line between illegal and proper earnings management. Ryerson, F. (2009). Improper Capitalization and the Management of Earnings. Proceedings of AASBS, Vol. 16(1). Pp. 1-8. The author of this article, Ryerson, is a professor at the Macon State College in Georgia. The author attended the proceedings of the AASB, and from the proceedings, wrote this article. The article discusses the fact that, after the 2008 economic crisis, the public will be more focused on having increased transparency in reporting. However, an SEC study confirmed that financial fraud is being done in other ways, that of earnings manipulation of improper earnings management. The author goes on to state the most common forms of earnings manipulation as improper revenue recognition and expense recognition. Improper expense recognition is perpetrated by improper capital or deferral of expenses and improper use of reserves. The paper then goes on to explain this second part of earnings management concerning improper expense recognition. Shawver, T., & Clements, L. (2012). How Do Emotions Affect Ethical Evaluations for Accountants? Journal of Forensic & Investigative Accounting, Vol. 4(1). Pp. 20-38. Shawver, an Associate Professor of Accounting at King’s College, and Clements, a Professor of Accounting at Florida Southern College, are trying to explain the effect of emotion on ethical evaluations of earnings manipulation. In the accounting context, it is evident that there some emotional interplay between the evaluation of earnings manipulation. This is because the perpetrator of the manipulation is usually an accountant, and the person investigating the manipulation is also an accountant. The authors state that prior research suggested that emotions might shape the ethical evaluation and decisions made by an individual, therefore, the research goes on to explore the emotion that an accountant might feel when evaluating earnings management. In this regard, the authors find that accountants usually regret their actions when evaluating earnings management. Yang, C., Lai, H. & Tan, B. (2008). Managerial Ownership Structure and Earnings Management. Journal of Financial Reporting and Accounting, Vol. 6(1). Pp. 35-53. Yang, a Professor of Science and Technology, Lai and Tan, Professors of Accounting, try to determine the relationship between ownership structure of firms and the types of earnings management. The authors classify insiders as part of a firm’s executives in their research, and from this, determine that the quality of earnings management is affected by discretionary accruals. Specifically, the accruals in the firm fluctuate with executive ownership, indicating that that equity stakes by top members of a firm should be reduced in order to reduce agency costs and relationships. This ensures that the earnings reflected by management are les fraudulent that in other firms that do not have top executives in top tier management positions. Read More