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

NORTHCENTRAL ASSIGNMENT COVER SHEET Learner: David Onyekwena THIS FORM MUST BE COMPLETELY FILLED IN Please Follow These Procedures: If requested by your mentor, use an assignment cover sheet as the first page of the word processor file. Use “headers” to indicate your course code, assignment number, and your name on each page of the assignment/homework including this assignment cover sheet. Keep a Photocopy or Electronic Copy of Your Assignments: You may need to re-submit assignments if your mentor has indicated that you may or must do so. Academic Integrity: All work submitted in each course must be the Learner’s own. This includes all assignments, exams, term papers, and other projects required by the faculty mentor. The knowing submission of another person’s work represented as that of the Learner’s without properly citing the source of the work will be considered plagiarism and will result in an unsatisfactory grade for the work submitted or for the entire course, and may result in academic dismissal. RSH9103QLB Professor Mondy Gold FINAL COMPREHENSIVE ACTIVITY ACTIVITY 10: SECTION 8– UPDATED ANNOTATED BIBLIOGRAPHY Section 8: Final Comprehensive Activity Assignment 10: Paper 10- Updated Annotated Bibliography David Onyekwena Student, North Central University Table of Contents Page Abstract 4 Introduction 5 Annotated Bibliography 5 Abstract 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. This may results in manipulation of company’s 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, the 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. 30-44% 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 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 could be 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, the continuum from legitimacy to fraud. Annotated Bibliography Bianco, A., (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, December 23, 2002, pp. 64–66. This case study on Dennis Kozlowski affirms the extent to which earnings management can actually slip from legitimacy to fraud. Under the leadership of Dennis Kozlowski, 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 under 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. The article gives ethical issues affecting the behaviors of managers as in the case of Kozlowski. this article is very important for the present study as it provides an analysis how fraudulent behaviors from managers can lead to collapse of business empires. 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 decrease and 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 accounts manipulations. Beneish, M.D. (1999), The Detection of Earnings Manipulation. Financial Analysts’ Journal, 55 (5), 24-36. The author notes that the extent to which earnings are manipulated has been an area of interest to analysts, regulators, researchers, and other investment proposals for a long time yet literature contained little discussion of the detection of earnings manipulation. This study intended to develop a model for detecting earnings manipulation by distinguishing manipulated from non-manipulated reporting. This study is important because it is sometimes not easy to know if a firm is manipulating earnings until it is too late to salvage it and better detection models can enhance the detection of the same in order to protect the shareholders from future loses. For this reason, this study is important for review of the present study on earnings management. Bartov, E and Mohanram, P. (2004). Private information, earnings manipulations, and executive stock-option exercise, The Accounting Review, 79(4), 889–920. This paper investigated the decision by top-level executives of more than 1,200 public corporations to exercise large stock option awards in the period 1992-2001. The researchers hypothesized that the predictive ability of abnormally large option exercises on stock return future performance represents private information about disappointing earnings in the post-exercise period. The results confirmed their hypothesis. This study can inform the present study on what other ways in detect earning management as was in the case of the study by Beneish (1999). While the previous study showed how one can distinguish between manipulated financial reports and non-manipulated ones, the present study shows how private information can be used to achieve the same. Shawver, T., and Clements, L.H. (2012). How do emotions Affect Ethical Evaluations for Accountants? Journal of forensic and investigative Accounting, 4 (1), 20 – 38. This paper is premised on the fact that there is a significant amount of research on ethical decision making processes with a number of proposed models for the same yet none of the models address the role of emotions and their effect on ethical evaluations and intentions. Further, examination of effect of emotions in accounting and more specifically on earnings management is lacking. The paper fills in that gap in literature by performing an analysis of effects of emotions among accountants on the ethical evaluations of firms in earnings management. The research contributes to the theory and practice of accounting by exploring the emotions an accountant may feel when evaluating earning manipulations. This is important for the present study as it informs on whether there is regret on the part accountants for manipulating earnings. García Lara, J.M, Garcia Osma, B. & Penalva, F. (2012), Accounting Conservatism and the Limits to Earnings Management, (October 23, 2012). Accessed 23 March 2013 from http://ssrn.com/abstract=2165694 or http://dx.doi.org/10.2139/ssrn.2165694 The authors noted that there is an untested common assumption in prior literature that conservatism limits the opportunities for successful accruals-based earnings management. The study tested this prediction and also whether by imposing limits to accruals manipulation, there is a downside to conservatism in the form of increases in real earnings management. Using a large US sample for the period 1991-2010, the study found a negative relationship between conservatism and accruals manipulation. The study also found a positive relationship between conservatism and real earnings management. This study is important because it adds on to the body knowledge of earnings management by focusing on the role of conservatism in earnings management. 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 this problem. Read More