Understanding Earnings Management

Business and Finance

Earnings management is a process carried out deliberately, in accordance with accounting principles to direct the level of reported earnings. Some accounting practitioners consider this process as a step to intervene or manipulate financial statements with the aim of tricking stakeholders who want to know the performance and condition of the company. Additionally, if you want to hire a trustworthy bookkeeper for protecting the accuracy of your financial statements, we suggest you hire the bondi junction xero bookkeeper.

The term intervention is used as a basis for referring to earnings management as a form of fraud. While other parties still consider this managerial engineering activity, not as cheating. The reason is that the intervention is carried out by company managers within the framework of accounting standards, which is still using accounting methods and procedures that are generally accepted and recognized.

This intervention in financial statements is not carried out without reason. There are several common causative factors, namely:

1. Accruals management

This factor is usually associated with all activities that can affect cash flow and profits which are personally the authority of the manager (manager discretion).

2. Application of an accounting policy that is mandatory

This factor is related to the manager’s decision to implement an accounting policy that must be applied by the company. Either apply it earlier than the stated time or postpone it until the time the policy is effective.

3. Voluntary changes in assets

This factor is usually related to managers’ efforts to change or change a particular accounting method among the many selectable methods available and recognized by existing accounting bodies (generally accepted accounting principles).

Earnings management is closely related to financial statements made by the company as an illustration of its performance. Therefore to do this, the management must first arrange and make accounting estimates. Thus it can predict which items will be added and subtracted to adjust the company’s earnings report.

In addition to managing it from the beginning, the management can also change the accounting method or shift the calculation period of the financial statements so that they get the desired amount of profit.

This process can indeed benefit the company and is not a prohibited thing to do. However, earnings management can make financial statements biased and the information that should be submitted will not be transparent.

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