Earnings Management (EM) can be defined as the use of judgment in financial reporting and in structuring transactions to alter financial reports with the intention to mislead users about the underlying economic performance of the company or to influence the contractual outcomes that depend on the reported accounting numbers (Healy and Whalen, 1999). EM is quite prevalent in private entities and a great extent of literature exists on EM practices in private enterprises.

There are many reasons for firms to practice EM. These include managerial compensation effects, borrowing cost effects, equity offerings, management buyouts, meeting analysts forecasts and reduce or increase regulatory costs or benefits. The reason why firms are able to manipulate earnings is that there is flexibility in the accounting standards that allow a greater variety of accounting results.

From the vast amount of EM literature, it can be seen that good work has been done in private entities and little work has been done in State Owned Enterprises (SOEs) and in the Pacific Island Countries (PICs). While it can be ascertained that the instances of EM are present in SOEs there are differences in the incentives for EM in privately owned enterprises and SOEs. SOEs are those enterprises owned and operated by the government. In the PICs there are many SOEs.

Audit Practice Journal, Earnings Management, EM, State Owned Enterprises, SOEs, Cost Effect, Regulatory Costs, Pacific Island Countries, PICs, Fiji Electiricity Authority, FEA, Absolute Values of Discretionary Accruals, ABSDAC, Eeconomic Performance, Management Buyouts, Management Compensation Plans, Cost Effects, Equity Offerings, Discretionary Accruals, DAC.