The IUP Journal of Accounting Research and Audit Practices:
Earnings Management: Conceptual Framework and Research Developments

Article Details
Pub. Date : Oct, 2018
Product Name : The IUP Journal of Accounting Research and Audit Practices
Product Type : Article
Product Code : IJARAP11810
Author Name : Deepa Mangala and Mamta Dhanda
Availability : YES
Subject/Domain : Finance
Download Format : PDF Format
No. of Pages : 14

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Abstract

Financial reports are prepared to ensure timely availability of reliable information regarding companies' state of affairs to its users. But when financial statements fail to meet the information expectations of the stakeholders due to lack of qualitative characteristics (ICAI, 2000) like understandability, relevance, reliability, comparability and faithful representation, it raises a question mark on the authenticity of financial reports by corporate houses. The absence of true and fair financial reporting indicates the presence of manipulation in accounting numbers, which can be in the form of fraud, creative accounting and earnings management. Earnings management is modifying the reported accounting figures by using the discretion provided by the accounting standards in such a way that there is no impact on the overall value of the firm. Earnings management is the first step which, if not paid attention to, gets aggravated and becomes fraud. The present paper approaches earnings management keeping research developments and the concepts related to earnings management in view.


Description

Accounting numbers are a record of transactions that occur in a business organization. Accounting information is crucial to all the stakeholders and its relevance varies from one stakeholder to another. Traditionally, accounting information has a dual role to play: informative and stewardship (Ronen, 1979). Informative role of accounting is meant for investors' prediction of future cash flows and risk assessment, whereas stewardship role induces a manager to act in the best interest of the shareholders. In the case of stewardship, managers look after the property (organization) of the owners and are liable (accountable) for their actions to the owners. Managers fulfill the information need of the owners and other stakeholders in the form of financial reports. But personal motives, contractual incentives or organizational obligations may induce the managers to indulge in undesirable manipulation of books of accounts. In such a situation, the only option left with the owners is to demand accounting information in the form of financial reports. Manipulation is skillful alteration in accounts practiced by internal parties of an organization to mislead external parties in order to derive personal benefits. Earnings management is the initial form of manipulation.


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