What are earnings management practices?

Earnings management refers to a company’s deliberate use of accounting techniques to make its financial reports look better. Earnings management can occur when a company feels pressured to manipulate earnings in order to match a pre-determined target.

Do you think GAAP rules allow for earnings management?

At the other end, U.S. Generally Accepted Accounting Principles (GAAP) allow for managerial discretion in reporting decisions, and many people believe that using that discretion to achieve earnings objectives is an integral part of doing business and protecting the interests of shareholders.

Which of the below practice can be an example of earnings management?

Examples of Earnings Management For example, assume a furniture retailer uses the last-in, first-out (LIFO) method to account for the cost of inventory items sold. Under LIFO, the newest units purchased are considered to be sold first.

How does earnings management relate to accounting quality?

If earnings is managed by using corporate accruals for reporting purpose then we call it earnings management. The quality is a measurement indicator such as high quality of earnings means less corporate accruals in earnings and poor quality of earnings indicates high corporate accruals in earnings.

Is earning management legal?

Earnings management may be defined as “reasonable and legal management decision making and reporting intended to achieve stable and predictable financial results.” Earnings management is not to be confused with illegal activities to manipulate financial statements and report results that do not reflect economic reality …

How many types of earnings management are there?

There are two types of earnings management: efficient earnings management (i.e., to improve earnings informativeness in communicating private information) and opportunistic earnings management (i.e., management reports earnings opportunistically to maximize his/her utility) (Scott, 2000).

What is bogey and cap?

With a typical bonus scheme, reported net income will have a lower bound called bogey and upper bound called cap. A manager’s bonus will increase as reported net income increases, unless there is a cap at which point the bonus will remain the same as net income continues to increase beyond the cap.

How do earnings management practices affect the quality of earnings?

Earnings management has a negative effect on the quality of earnings if it distorts the information in a way that it less useful for predicting future cash flows. The term quality of earnings refers to the credibility of the earnings number reported. Earnings management reduces the reliability of income.

What is a bogey portfolio?

A bogey typically refers to a specific benchmark that is set by the fund company as a close comparison for the fund itself. Selecting a bogey is a vital portfolio task; choosing an index or benchmark bogy requires forecasting volatility and interest rates.

Is income smoothing illegal?

Income smoothing is not illegal if the process follows generally accepted accounting principles (GAAP). Talented accountants are able to adjust financial books in an above-board way to ensure the legality of income smoothing. However, many times income smoothing is done under fraudulent methods.