Morality of Management Earnings Essay

The term Earnings Management is a form of number smoothing used by a companys anxiety to manipulate or influence the companys net profit to match a pre-determined dollar amount. This is done in an begin to keep fiscals stable, as opposed to showing financial fluctuations. When a company appears to be stable it has a greater chance of attracting investors, which in turn demands higher sh be prices. When a company is able to nurture higher sh ar prices, the more likely they are to draw new investors. Likewise, a company that has paltry share prices is often a reflection of a company that is not doing well financially (Investopedia, 2009, para 2). Often, companies perform abusive earnings management dos in an driving to make the verse (Inevestopedia, 2009, para 4). In order to do this, management may be tempted to make up numbers as a means of drawing investors or to make their company appear financially stronger than what it actually is.The methods used in earnings management can be varied, and may be done through function of financial numbers or operational procedures (As cited by Gibson, 2013, p. 84). In a study conducted by the National link of Accountants, a questionnaire was prepared which described 13 observed earnings management situations (As cited by Gibson, 2013, p. 83). Below are five listed generalizations that can be made by the study findings regarding short-term earnings management practices. 1. Respondents of the stack tangle that earnings management practices utilizing accounting methods to be less satisfying than methods of run procedure manipulation (As cited by Gibson, 2013, p. 84).Manipulation of operations can include something as simple as pushing expatriation to the last day of the fiscal quarter or asking customers to take early delivery of goods (As cited by Gibson, 2013, p. 85). Another example is when companies make Unusuallyattractive terms to customers or Deferring necessary expenditures to a accompanying year (Rose nzweig Fischer, 1994, para 5). According to survey responses, practitioners had fewer ethical dilemmas when using operational earnings management tactical maneuver compared to those involving accounting methods (Rosenzweig Fischer, 1994, para 7). 2. When it came to accounting, survey respondents felt that increasing earnings reports to be less delicious than the decreasing of earnings reports (As quoted by Gibson, pg. 84). Managers appear to be more comfortable in reducing the overall company improvement when reserves show elevated numbers (As cited by Gibson, p. 85).It would seem that management major power assume that if their reserve numbers are high, then reducing them to show lessor profitability acceptable. If the money is authentically there, then what is the harm in reducing the profit amount to abut a designated number? However, when it came to insurance coverage profit extends, managers were hesitant in determining what earnings management methods would be ethic al and which would not. 3. Generalization 3 is similar to generalization number two where ethics are concerned. Respondents felt that if earnings management tactics were kept small that it was more acceptable than if the effects were large (As cited by Gibson, p. 84). When manipulations of numbers or operating procedures are kept to smaller changes, managers seem to feel it more justifiable and acceptable.For instance, if management were asked to show an increase of sales by $12,000.00, much(prenominal) manipulations would be more ethical than if asked to increase sales by $120,000.00. Likewise, if employment costs were delayed for advertising to meet a quarterly budget it would be more acceptable than if production costs for advertising were delayed to meet the end of year fiscal budget. This also ties in to generalization 4, the time period of the end effect. 4. Time periods play a large part in determining how ethical earnings management practices are. As described above, when asked to alter numbers or operating procedures in an effort to make quarterly forecasts, managers seemed to feel this practice to be more acceptable.When asked to alter numbers or operating procedures for annual reports, however, the line between ethical and questionable is blurred. 47% of respondents to the survey felt that earnings management practices that were made to meet an interim quarterly budget to be ethical, while all 41% felt that such manipulations in order to make an annual budget to be ethically sound (Ascited by Gibson, 2013, p. 85). 5. When asked whether it was acceptable to offer special extended credit terms to customers in an contract to increase profits, only 43% of survey respondents felt the practice to be ethical.However, when asked if the same end offspring would be ethical if achieved through ordering overtime to ship as much product as possible at years-end, 74% of respondents felt this manipulation to be ethical (As cited by Gibson, 2013, p. 85). A as tonishing 80% of survey respondents felt that selling excess assets as a means of realizing a profit to be ethical, while only 16% felt it would be questionable (As cited by Gibson, 2013, p. 85). Short-term earnings management procedures, while questionable, are often legal. The alteration of financial information in an attempt to meet budgets or as a modality to show profitability is often alluring and an easy way to draw investors. Managers who use earnings management tactics must take into consideration the impact such actions may have with key stakeholders (As cited by Gibson, 2013, p. 86).When numbers are skewed favorably, it gives stakeholders a false sniff out of security in their investments. Companies who engage in short-term earnings management practices often set themselves up for losses over time. When numbers are adjusted to make a quarterly or periodical dollar amount, chances are the following quarter will find the company in the negative. Such practices are rarely foolproof and care must be taken when making earnings management practice decisions. Focusing on long-term earnings management practices are ultimately more favorable, but in order to be effective management must remain committed to consistent operational procedures. omen the product needs of customers and looking ahead are key strategies for keeping sales income at a consistent level. Waiting until the last minute to offer customers generous credit terms in an effort to boost end of year or quarterly sales is a short-term answer at best. Looking at the purchase history of customers and integrating theses sales number into future budgets should help lenify the need to resort to last minute scrambling to make budget targets.