Define the phrase “earnings management.” Under what conditions, if any, is earnings management acceptable? Do auditors’ responsibilities include actively searching for instances of earnings management by clients? Defend your answers.
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- Evaluate earnings management from a utilitarian perspective. Can earnings management be an ethical practice? Discuss why or why not.Evaluate the following statements from an ethical perspective:“Earnings management in a narrow sense is the behavior of management to play with the discretionary accrual component to determine high or low earnings.”“Earnings are potentially managed, because financial accounting standards still provide alternative methods.”Discuss the concept of earnings management and its ethical implications in financial reporting. What are some common techniques used in earnings management, and how do they affect the quality and transparency of financial statements?
- What is the relationship between accounting quality and earnings management?Considering the demand for auditing services, which of the following involves“Managers receiving the full compensation in their employment package for what they are worth”.a. Justice theoryb. Motivational theoryc. Needs of Investors and Creditors theoryd. Principal-Agent theorya) Drawing on prior earnings management literature, critically appraisemanagerial incentives in manipulating reported earnings.b) Using examples, discuss three techniques used by firms to manage reportedearnings.
- Reported accounting earnings provide valuable information to investors, lenders and regulators. Reported income is also important for executive bonus. Yet, within the structure of GAAP, managers can use judgment in computing accounting earnings and in structuring transactions. In other words, managers can engage in earnings management. What activities need judgment in preparing the accounting earnings? What safeguards can you suggest for reducing or preventing harmful earnings management intended to mislead investors and the market?Reported accounting earnings provide valuable information to investors, lenders and regulators. Reported income is also important for executive bonus. Yet, within the structure of GAAP, managers can use judgment in computing accounting earnings and in structuring transactions. In other words, managers can engage in earnings management. What activities need judgment in preparing the accounting earnings?Define materiality. How does materiality come into play when assessing financial statement restatements? Other than materiality, what is the one word that might be the most distinguishing factor between ethical earnings management and unethical earnings management?
- How can the tools in assessing accounting quality assist financial analystExplain why it is difficult for researchers to convincingly document earnings management.a) ‘Assessing the financial reporting quality is an important aspect of financial analysis’Required:Critically discuss this statement. (Discuss the concept of accounting quality, permanent and transitory earnings as part of your answer). b) Discuss five incentives that might cause management to manipulate reported earnings numbers.