Yakub02
Banned
Earnings management techniques include deferring or accelerating expense or revenue transactions, or using other methods designed to influence short-term earnings. Aggressive earnings management results in stakeholders being misled to some extent about an entity's performance and profitability.
At the extreme, aggressive earnings management can involve acts that may constitute a criminal offence. Commercial pressures The strength of a regulatory framework may be undermined by commercial pressures on those responsible for preparing financial statements.
Examples of these commercial pressures are: Adverse market reactions to the share price of a listed entity when results fail to meet the market's expectations (which directors and management may have encouraged), whether or not the expectations were reasonable;
Directors and management's incomes being highly geared to results and/or heavily supplemented by stock options;
The importance of meeting targets to ensure protection of the jobs of directors, management and other employees;
The desire to understate profits to reduce taxation liabilities; Legal and regulatory requirements to meet specific financial thresholds or ratios; and The need to ensure compliance with loan covenants or to pacify bankers.
The reason for this is that it might allow them to increase profits in the future. For example, if an asset is written off this year but used in the future there will be no future expense to set against the future revenue.
At the extreme, aggressive earnings management can involve acts that may constitute a criminal offence. Commercial pressures The strength of a regulatory framework may be undermined by commercial pressures on those responsible for preparing financial statements.
Examples of these commercial pressures are: Adverse market reactions to the share price of a listed entity when results fail to meet the market's expectations (which directors and management may have encouraged), whether or not the expectations were reasonable;
Directors and management's incomes being highly geared to results and/or heavily supplemented by stock options;
The importance of meeting targets to ensure protection of the jobs of directors, management and other employees;
The desire to understate profits to reduce taxation liabilities; Legal and regulatory requirements to meet specific financial thresholds or ratios; and The need to ensure compliance with loan covenants or to pacify bankers.
The reason for this is that it might allow them to increase profits in the future. For example, if an asset is written off this year but used in the future there will be no future expense to set against the future revenue.
