Earnings Management Is a Necessary Business Tool to Ensure Financial

Question: Discuss about the Earnings Management Is a Necessary Business Tool to Ensure Financial ? Answer: Introduction Earning management is method that focuses on the positive presentation of the financial statements that improves the image and financial reporting of a company; nonetheless it is manipulative strategy to adjust profits with in accounting norms and legitimating (Phillips, 2010). The earning management aims to provide advantage to the business operators especially giant and multinational companies by misleading the profits reporting in the financial statements to entice the stakeholders and for the growth of business image and reputation. However, in the recent year earning management utility is one of the most concerned topics for researchers and scholars (Phillips, 2010). Similarly, this report is focused on the critical examination of earning management and its utility in accounting practices. This paper emphasised on the use of earning management as a true and fair view of operation. In addition to this, it identifies the agreement and disagreement pertaining to integration of earning management as a business tool that depicts the true and fair financial reporting. However, it is purely a choice of accounting manager to incorporate accounting policies and standards to attain the specific goals (Ronen and Yaari, 2008). Hence, this report is exploring the concept of earning management which is also known as creative accounting and window dressing in financial accounting to show the legit and true financial situation of the company. Earnings management is a necessary business tool to ensure financial accounts reflect a true and fair view of operations Financial accounting is a crucial part of financial management business function and operations for companys stakeholders (Zhu, 2012). The scientific approach in the accounting as positive accounting theory is very essential for corporate organisation and side by side earning management is also vital for financial management. In the view of many researchers and scholars earning management is an extremely controversial concept that tempers financial reports to favour the business operators (Bissessur, 2008). Disclosure management is being intentionally directed in favour of organisations and to divert the decision makers and investors. The external financial statements are manipulated for the personal interest along with following accounting standards and policies (Bissessur, 2008). These alternative accounting principles and policies are used to maximise the market value of behaviour or market share of the company in earning management under financial accounting theory. Likewise, the above points can be divided into two parts that is the financial reports are the only part which is influenced directly through earning management profits and there is no relation with the real profit earned by the company. In other words, it only amends the distribution of profit time of corporate earning and do not influence the actual profits of the company (Bissessur, 2008). Furthermore, the earning management is a legit practice with in the accounting standards and policies to manipulate the artificial revenues generated by the company and managing the false boundaries regarding financial accounting. The purpose of conducting earning management in the enterprise is to augment the market value of the company and to shift the decision making of investors and stakeholders in business operators favour (Leung, et al., 2012). It straightforwardly influences income or payment of the corporate business operators plus helps in exuding the smooth profits, increasing the market share prices and defaulted debts of corporate. Besides this, financial reporting is one of the performance measures in the corporate world, thus it is concluded as a need for the survival of the companies (Leung, et al., 2012). Similarly, in china capital market financial statements and reports are subjected to the government rules and regulations such as share placements, market behaviour, business listing and delisting is controlled by the government directly. Accrual management which includes changes in the accounting policies in the dues reported in the income statements are the part of earning management (Ronen and Yaari, 2008). In addition to this, it entails accrual management associated with change in the depreciable life of assets; changing accounting estimates adjustments of profits yearly and does not involves cash flows of income (Leung, et al., 2012). Therefore, it can be concluded that is related with the transactional planning and incorporating non accounting methods to adjust and manipulate financial management. Although, media and many researches shown that the concept of earning management is earning manipulation and adulteration of accounting facts for the personal benefits, yet it has various positive sides and advantages in accounting practices for shareholders of the company (U.S. Senate, 2010). As per the argument, the earning management is an internal information management to present the financial conditions to the shareholders as a communication method. It affects the cost of capital because of the internal business choices of information and communication related to the disclosure of accruals and different alternatives adopted by the accounting policies. It is been illustrated as a when a company chooses to depreciate its asset with the straight-line depreciation method , the financial condition of the company is assumed to be not good and considered as it cannot bear the accelerated depreciation (U.S. Senate, 2010). On the other hand, when a company adopts the accelerated depreci ation or double declining balanced depreciation, it is the indication of good financial condition of the company. Moreover, one of the advantages of earning management is to reduce the presentation of profits fluctuation which provides reliability to the investors as a long term aspects and depicts stability trend of revenue generation by the companies (Sun, 2010). Accordingly, there are various multinational and giant companies are there which effectively incorporates earning management to minimise the profits margin trend that exempts it from business cycle of the company by representing a smaller amount of variation in the corporate profits . In the same way, to make the flexible response of shareholders in adverse situations that can cause breach of contract to avoid corporate extra cost of capital, earning management is a very effective way to manage the situations and optimise the utilisation of profits (Sun, 2010). Furthermore, it has been observed that it is a neutral concep t of financial accounting and its incorporation helps the corporate organisation in stabilising the financial situation. Contrary to this, the earning management is short term behaviour that does not help the company in long run or physical growth or development (Ronen and Yaari, 2008). The reason behind its ineffectiveness is no elevation in the physical money of the company, damage of the interest distribution of the shareholders and same condition of operation difficulties. Along with this, basically it helps in influencing the decision making, judgement by misleading the accounting facts to the investors and demoralizes the efficient distribution of resources in market functions (Rittenhouse, 2013). It trims down the comparability of competitiveness within the companies, fair and credible information exchange and purpose of financial reporting to its stakeholders. Likewise, in china market incorporation of earning management has replaced the actual scenario of the organisation to a large extent that increases the market risk (Ronen and Yaari, 2008). The corporate earnings and revenues of the compan y are being fraudulently wrong figured to entice the shareholders and investors in the market. It is misleading tool to show and impress them with fictitious and unreal revenue of the company. Nonetheless, problem arises when investors and decision makers cannot identify the earning management, though some of the earning management forms can be recognised with cash flow statements and corporate reporting earning (Marai1 and Pavlovi?, 2014). It is the worst form to lose the capital market reliability as it indicates the financial reporting of entire system with accounting norms and policies that indicates the performance a company (Marai1 and Pavlovi?, 2014). The disingenuous scenario in the financial reports is concerned with the advanced income recognition in the statements, massive write-off of assets and research and development cost and impractical to extract preparation. Therefore, some of the researchers even concluded that the earning management is a very unhygienic practice which creates fictitious financial assessment of the organisation (Rosenfeld, 2000). However, financial reporting and statements are meant to present the actual and fair information about the as sets and liabilities of the company. Not only, earning management is not a part of ethical part of management but also points out the professional ethical conduct of the managers job (Tassadaq and Malik, 2015). Furthermore, it only considers the support for companys reputation that involves top management and their personal benefits, but equally ignores the reliability and trust of stakeholders of the company. Although, it is the practice which is considered to be legal and according to law but it is manipulation in profits which can harm the companys future if being materialistic loss occurs or actual reporting is being exposed in the market. Thus this conducts do not served as professional ethics of the managers and management of the company (Tassadaq and Malik, 2015). At the same time, it destroys the loyal corporate culture, mutual trust and sincere culture for some short term profit gained by the business operators putting entire organisations goodwill and reputation at the stake. Besides this, the earning management and its effectiveness in the accounting management is varied with different capital markets of different countries (Tassadaq and Malik, 2015). Developed capital markets have positive implication of earning management as the position of the companies are already focused in a growth and developed economy. Moreover, the accounting data signals are being used by the investors more prominently and with advanced methods which is the best feature in developed stock market environment (Yadav, 2013). On the other hand, less developed capital market in the economy responses less to the study of financial reporting and adversely affects the result of earning management. Due to unstable and vast variation in the deviation of actual profits makes it more notable to the investors and decision makers (Millstein, 2005). Thus it can be examined in the study that the role of economy and stock market condition that is developed and developing or less developed plays a crucial role in identifying the importance and benefits of earning management. In addition to this, the earning management use is also related with the judgement of the investors and stakeholders view on how many the financial statements can be manipulated (Mamo and Aliaj, 2014). Furthermore, what affects of the misleading information can be seen in the near future and how many times its affects will be seen in the financial reporting of the company (Verschoor, 2015). These all concerns are connected with the parameter to pass the designed and standards of the market presentation and to improve the market condition of the organisation. Due to this, many of the countrys governments have integrated rules and regulation of disclosure of financial statements worldwide and imposed various security norms and policy to protect the stakeholders interest (Ruiz, 2016). Pertaining to the reporting of financial statements display accounting information is being shared with the stakeholders of the company. Some of the regulations and policies of corporate governance and cor porate social responsibility is also being designed to restrict the misuse of earning management and improve the capital market condition worldwide (Mamo and Aliaj, 2014). There is a recent case was reported as scandal of Toshiba in 2015, where the management hiked its earnings and profits of more than $1.2 billion for around seven years (Soble, 2015). The scam of earning management is scene in more than one company and in different countries including various multinational and big companies. Toshiba is a very well known technical advanced company, but its reputation and corporate culture to compromise ethical conduct due to immense pressure from management lead this massive scandal by the division manager. The committee had also investigated further and found that the scam of misrepresentation of net profits was intentional by all the senior leaders (Wokukwu, 2015). The fraud was systematically carried on by the senerial leaders by explaining reasonable explanation and insufficient information to the auditing team regarding deliberation of fictitious revenue. Along with this, accounting department systematically arranged all the reports as per earning management for over seven years that lastly exposed them as accounting scandal. The vice president of the company was held responsible to the scam and resigned from his post. This Japanese company is being doubted after the scale of the misrepresentation in the accounting through earning management which is also been used by the Olympus company in 2011 (Soble, 2015). Therefore there are various incidents that evoke the earning management as an evil practice to mislead the investors of the company. In the end, this report unfolds the concept of earning management practices that does not provide the actual scenario of the financial accounting and leads to various scams and scandals of multinational and big companies (Wokukwu, 2015). Conclusion From the above discussion, it can be interpreted that earnings management is a necessary business tool to ensure financial accounts reflect a true and fair view of operations is a false statement. Some of the highlighted part of the discussion includes the pros and cons of the earning management. The earning management is desired for some of the companies where the presentation is very much important but has only short term represented affect and does not have any materialistic lose. On the hand, it has been analysed that earning management is misleading the information and misrepresentation of accounting to attract the investors and personal benefits of business operators. The above research has also depicted some of the methods such as huge write off of assets and expenses, allocation of resources and profits in different time frames that has been implemented to raise the earning management. The reason of its use is simply related with the image augmentation and market share price increase. Along with this, earning management is also depend on the capital market conditions of any country which stimulates its positive and negative side in the economy to the investors. References Bissessur, S. W. 2008. Earnings quality and earnings management. Rozenberg Publishers. 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