Accounting Theory

652 words | 3 page(s)

This part gives a brief background on the topic under discussion. Earning management is defined as the practice of harmonizing a company’s earnings to counter inflations. Normally, businesses face varying challenges within the environments they operate which affect their profitability in the short term. Since most investors prefer stable organizations, large firms deliberately manipulate their earnings positively.

The Motivation behind Earnings Management
The following part will focus on the reasons which make managers manipulate their earnings. According to Ghazali, Shafie and Sanusi, managers opt to manage their earnings out of the fear of reporting losses (2015). To most managers, achieving consistent results can be quite a challenge. The demand to perform and register positive results usually compels managers to resort earnings management. Ultimately, it is the urge to satisfy investors that inspires some actions. In other instances, some managers who incur losses might want to protect the prices of the stocks under their leadership thus leading to the manipulation of earnings.

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Analysts’ Role in Earnings Management
On this, the focus will be on analysts and their relevance in organizational management. In particular, their role in earnings management will be analyzed. According to Yu (2008), analysts are external monitors who audit the financial reporting in companies. Their views on companies’ performance guide investors, and managers, on the right action to take. Analysts ought to uphold professionalism.

The paper ought to support the claims made through evidence from empirical studies. For instance, the relationship between corporate governance and earnings management can be proven through linear equations. The paper ought to cite previous studies which focused on the relationship between the two aspects of accounting. In the course of the study, there are challenges which will be faced. The final report will highlight the challenges faced in conducting the study.

Mechanisms Affecting Earnings Management
According to Sáenz González and García-Meca (2014), earning management is influenced by corporate goverance. A hands on managerial approach shows a non linear relationship with earnings management. Besides, increased federal regulation also leads to less manipulation of earnings.

Ghazali, Shafie and Sanusi assert that opportunistic behaviours, which collectively represent profitability and cashflows, also influence earning management (2015). The authors argue that there are so many factors which might compel managers to manaipulate their earnings. In their publication, the other factors which lead to earnings management are finacial distress and the method applied in monitoring theorganizational perfomance.

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