Nobody downloaded yet

Business Financial Crime: Earnings Management - Essay Example

Comments (0) Cite this document
Business Financial Crime: Earnings Management Introduction: Financial crimes occur in businesses when there is any kind of falsification taking place in the accounting measures. This is generally carried out intentionally for the purpose of convincing others with financial results that are false, but would increase the value of the company in the industry…
Download full paperFile format: .doc, available for editing
GRAB THE BEST PAPER93.5% of users find it useful
Business Financial Crime: Earnings Management
Read TextPreview

Extract of sample "Business Financial Crime: Earnings Management"

Download file to see previous pages It can be defined as a process of intentional interference of the management in the establishment of the earnings of a business, misrepresenting the data to show better results than they actually are. Several reasons lead to management of earnings, which include manager’s compensation, raising stock price, or pushing for government funding. There are different strategies available that managers can use for the purpose of earnings management and hence satisfy their selfish objectives (Wild, 2006, pp.86-87). Earnings management, in exchange listed companies, is not fraud but a case of caveat emptor for investors. With regard to the increase in financial crimes in businesses, and several instances of earnings management being reported, this report would try to focus its study on the literature of earnings management and analyze the cases reported to draw a conclusion with a view on the concerned topic. Earnings Management: An Overview Earnings management is the process of intentionally misrepresenting financial data in the accounting measurements such that the company can show greater profits and more value than it actually has obtained. The process can be “cosmetic” where managers influence accruals without affecting cash flows or it can be “real” where cash flows are acted upon to manage earnings. There are three usual strategies that managers can exploit for earnings management. These include either increasing the current income, or taking a “big bath” by decreasing the current income, or income smoothing. Increasing the current income is done to represent a company more positively. It can be done for a long episode. In cases of growth, the accrual reversals are lesser than the current accruals, thereby increasing the income. The big bath strategy involves taking many write-offs in a time when performance is poor. Because of the unusual nature of the big bath, users generally discount the financial effect. In income smoothing, the managers enhance or reduce the reported revenue to reduce its volatility (Wild, 2006, pp.86-87). The maximum opportunities for earnings management lie in areas of revenue recognition, valuation of inventory, estimations of provisions like bad debts, and charges like restructuring or repair of assets. Important methods of earnings management include “Income Shifting” and “Classificatory Earnings Management”. The process of income shifting moves the income from one period to another. Accelerating or interrupting the revenues or expenses does this. This often results in turnaround of the effect, which is why this is very useful in the process of income smoothing. Earnings can also be managed by selectively classifying incomes and expenses in particular parts of the income statement. A common form of classificatory earnings management is to report expenses along with such unusual items that are given lesser importance by analysts (Wild, 2006, p.89). It is very important to identify and adjust the earnings management in the financial statement analysis because these distort the financial reports of a business. Before any conclusion is drawn by an analyst on whether a company is managing earnings or not, an analyst should check the incentives of the company, the history and reputation of the management, and the opportunities available for earnings mana ...Download file to see next pagesRead More
Cite this document
  • APA
  • MLA
(“Business Financial Crime: Earnings Management Essay”, n.d.)
Retrieved from
(Business Financial Crime: Earnings Management Essay)
“Business Financial Crime: Earnings Management Essay”, n.d.
  • Cited: 0 times
Comments (0)
Click to create a comment or rate a document

CHECK THESE SAMPLES OF Business Financial Crime: Earnings Management

Finance and Accounting: Business Financial Crime

...Business Financial Crime Introduction: Financial crimes occur in businesses when any kind of falsification takes place in the accounting measures. This is generally carried out intentionally by the financial management team of a company for the purpose of convincing others with financial results that are false, thereby increasing the value of the company in the industry. Such crimes may include basic company frauds, falsified claims of travel or entertainment, cheque fraud, identity fraud, misappropriation, computer related crimes, or frauds and...
11 Pages(2750 words)Research Paper

Creative Accounting and Earnings Management

...bankruptcy in the US history. USA: iUniverse. Benzacar, K. (2009). IFRS brings a radical change to financial statement presentation. [Pdf]. Available at: [Accessed on March 16, 2012]. Bissessur, S. W. (2008). Earnings quality and earnings management: the role of accounting accruals. Netherlands: Rozenburg Publishers. Columbia Business Law Review. (2005). Corporate Governance Failures: Is Paramlat Europe’s Enron? [Online] Available at: [Accessed on March 12, 2012]. Dartmouth. (no date). WorldCom: Who’s really gonna notice $9 billion dollars...
12 Pages(3000 words)Essay

Reported earnings or actual earnings

...?Do companies mis profits through accounting techniques? I. Introduction Recently, the four largest Australian banks have been under scrutiny. Amonth ago, media reported that Australian banks have earned record profits in 2010 (Bell 2010). Yet, just a few months earlier in 2009, Elliot (2009) in an Australian Broadcasting Corporation report described Australian banks to be as bad as AIG, a bank associated with both the US and world crises, an allusion that Australian banks are in crisis and that the supposed crises of Australian banks would lead to an economic crisis in Australia. The rapidity with which banks are able to project a bad or rosy financial picture suggest that businesses are...
11 Pages(2750 words)Essay

Earnings Method Management Assignment

...and therefore both planned and actual was similar for period 3. Exercise 13-3 Basic Performance Measurements Control Account/Work Package Budget Earnings Method Performance Measure Measurement Periods 1 2 3 4 5 6 Totals 2.1.3 Customer Service Solution Design Management Structure Design 10 0%/100% Planned (BCWS) 10 10 Earned (BCWP) 10 10 Customer Service Rep Role Description 20 40%/60% Planned (BCWS) 8 12 20 Earned (BCWP) 8 12 20 New Customer Business Process Design 30 Milestone Planned (BCWS) 3 12 12 3 30 Earned (BCWP) 3 12 12 3 30 Service Order Business Process Design 30 % Complete...
5 Pages(1250 words)Assignment

Business financial management

...projects. The company seems to be following the acclaimed policy of increased dividend payments to its shareholders each year, even when the growth in earnings tumbled significantly in the year 2004. Koch and Shenoy (1999, p17) mentions that the "dividend signalling models suggest that managers increase dividends only when they are confident that higher dividends can be maintained with higher subsequent cash flow". This action of paying dividends at the highest rate in the period of the lowest earnings growth rate also discloses that the management wanted to give an impression to the shareholders and investors that they were positive about the company's future...
8 Pages(2000 words)Essay

Financial crime

...AIG Downfall Introduction AIG, the American insurance giant would have been to the greatest financial crisis of America if not for the $85 billion rescue loan offered by the government. The most debated issue during the downfall of the company was the bets placed on credit default swaps, which was a $62 billion market in itself. A subsidiary of AIG in the financial product division provided insurance in terms of credit default swaps, also involving collateralized debt-pools, making the financial products all the more riskier. It was also discovered that the bets on credit default swaps were not the only cause for the company’s downfall. There were financial crimes involved in the issue, which included the addition of $500 million... to the...
3 Pages(750 words)PowerPoint Presentation

Business Financial Crime

...Earnings management, in exchange listed companies, is not fraud but a case of caveat emptor for investors” Earnings are the important aspect of any business organizations and the organizations thrives on the increase in the earnings. As a result, earnings become an important item in the financial statements, which reflects the profitability of the organization. However in recent times various discrepancies have crept in the financial market and the worth of organizations are not reflected based on the earnings. As a result it becomes difficult for the investors to choose the right...
10 Pages(2500 words)Coursework

Financial Crime

...Leshner Admits to Aiding in Fraud Conspiracy with LCN Family September 30, was the day that the La Cosa Nostra family found itself losing one its co-conspirators in its performance of fraud pertaining to the FIRSTPLUS Financial Group Inc. 30-year-old Pennsylvanian Cory Leshner admitted his guilt and participation in the conspiracy before U.S. District Judge Robert B. Kugler. The case which is being heard in Camden, New Jersey finds Leshner admitting to aiding and abetting in a conspiracy to commit wire fraud. The Department of Justice detailed the case that wassuccessfully filed in a press release that explained: “Leshner and 12 others – including Scarfo, an alleged member of the Lucchese La Cosa Nostra (LCN) crime family... of...
1 Pages(250 words)Essay

Financial Analysis - residual earnings

... that return on capital is the same as residual earnings. References list Diebold, F. X., Doherty, N. A., & Herring, R. 2012. The known, the unknown, and the unknowable in financial risk management: Measurement and theory advancing practice. Princeton, N.J: Princeton University Press. Easton, P. D. 2009. Estimating the cost of capital implied by market prices and accounting data. Boston: NOW Pub. Penman, S. H. 2011. Accounting for value. New York: Columbia University Press. Pinto, J. E. 2010. Equity asset valuation. Hoboken. N.J: Wiley. Wahlen, J. M., Bradshaw, M., Baginski, S. P., & Stickney, C. P. 2010. Financial reporting, financial statement analysis, and valuation. Mason, Ohio: South-Western.... Residual earnings...
1 Pages(250 words)Essay

Conflicts In Earnings Management

... Conflicts in Earnings Management Abstract In the contemporary business environment, the effect of manipulated accounting figures has proven to be devastating for a company as well as other associated parties. It should be taken into consideration that the financial losses caused due to accounting frauds, such as, misrepresentation of financial statements, are humongous. Such setbacks are detrimental not only for the company, but also for the economy as a whole. Preventing such accounting frauds has become the priority of auditors as well as other accounting regulatory bodies. As a result, a number of regulations have been formulated to...
16 Pages(4000 words)Essay
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.

Let us find you another Essay on topic Business Financial Crime: Earnings Management for FREE!

Contact Us