Earnings Management and Fraudulent Reporting
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Explain earnings management. How is earnings management distinguished from fraudulent reporting?
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Solution Summary
Earnings management is used by a company as a way to meet or exceed investors or analysts expectations. Is there a line that moves a company from earnings management to fraudulent earnings? Is there a difference between earnings management or fraudulent earnings? These questions are answered and two examples are provided.
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Accounting
In detail, explain earnings management. How is earnings management distinguished from fraudulent reporting?
Earnings management is a company that manipulates their financial earnings either directly or indirectly via accounting methods. A company will utilize earnings management when they are unable to meet investor expectations or expected unstable earnings. Earnings management follows the accounting standards and laws, but they are fraudulent because of being materially misleading. Also, the changes will not comply with established accounting standards and laws.
Let's review an example. A company will switch from FIFO inventory management to LIFO, which will help the company's financial ratios look better. However, ...
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