Earnings ManagementEarnings ManagementIs earnings management good or bad? Who (or which part of corporate governance mechanisms) is responsible to constrain earnings management? To what extent can the auditor constrain earnings management? Propose some methods for the auditors to detect and constrain earnings management. Does market react to firms earnings management behavior?
In order to discuss earnings management and what its affects are on business and whether or not it’s a good thing, one must first understand what earnings management really is. Earnings management is often referred to as creative accounting or income smoothing. By definition, earnings management is “strategies used by the management of a company to deliberately manipulate the company’s earnings so that the figures match a pre-determined target” (Investopedia.com). One of the main reasons that managers or companies manage their earnings is to meet a pre-specified target, which is often set by an analyst. Companies find it important to make their numbers because their earnings are the companies’ profit which analysts use to determine the attractiveness of that specific company’s stock. If analysts don’t like the earnings produced by the company, they find the stock to be unattractive which will affect the share price and low share price doesn’t make the company or management look good.
In contrast, if analysts don’t like the company, they also find the stock to be unattractive which will affect equity price and low share price
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How can we make predictions about the stock market?
We know that we will not be able to predict the price of stock, since we cannot predict the expected return on investment (ROI). Some organizations choose to pay commissions to brokers who are in touch with investors that are not involved in the performance of the company (such as, for example, the Securities and Exchange Commission’). So what do we do? We publish our own stock price, which we will pay to an agent. A broker or investment adviser can do this (see, for example, our article “Profit Managers and Investing With ETFs” which provides a better explanation of the fees paid to advisors (see also “Profit Managers and Investing With ETFs” by Michael W. M. Vigner).
Many firms will ask the advisor to provide you a fee for the fee. If you are unhappy about a fee, ask your broker or investment adviser what they will be paying to do your due diligence. The most common fee is $85 (a commission of $15)—$1,100 if any—and other fees include other fees from any company (eg. $85 for a consultation, $10 if a fee is owed, or $100 for the brokerage license fee). We always inform the advisor of this fee, but there is no guarantee these fees will be paid (see our article “Who Paid For The Fees”).
The most effective way to prepare your company for the market is to think about your company’s market value. For example, if you are developing a financial plan for a small business, you often need to take a look at how the company is expected to perform on short-term, long-term securities; such a plan can be used to adjust your company’s prospects. Other options for investment include a portfolio analysis, which we discussed in earlier sections.
As mentioned before, most investment firms take a fair amount of time and research and have a large collection of financial reports (such as the S&P 500 Investor Report, for example). The S&P 500 provides more information about investment products and business models based on these reports and it is important to recognize that the S&P 500 gives investors an opportunity to estimate their return on wealth (e.g., when shares of the Stock Exchange are trading at a discount).[2] The market at risk for the investment is the business that has the most value to investors, rather than the company that is most likely to experience negative long-term value losses. This means, of course, that the market values of stocks don’t reflect the future value of financial assets, nor does it mean that investors will be unable to access the highest value stocks of the future.[3]
In contrast, the financial markets do not offer the most information on the future value of financial assets. Instead, they provide much finer information on how much money investors are saving, the impact of policy on earnings and the financial conditions of large securities companies. And that information is the subject of much research in today’s world that has largely focused on market information. The market has been highly responsive to investor questions about investing, offering investors a more reliable look at what the market is worth.
The most valuable asset in a particular asset class is marketable securities, which are generally considered riskier than the most valuable securities in a given asset class. They are highly affordable, not to mention generally high in value.
How does a Financial Market Analyze A Financial Market?
It is important to note that a financial market is an objective form of measurement that is based on information about the value of a company and its share price. Financial market analysts work with a lot of data to create this set of judgments and they may or may not make any of these judgments. They can use these information or assume a particular view about their company’s financial condition but they can not tell that to investors. This is because, for example, most analysts don’t take into consideration a number of factors—often accounting rules and accounting patterns—that might affect the stock price at the beginning of a financial year—and sometimes, other factors—like the extent of the financial recession or financial stability in the future. Thus, they tend to view financial conditions as complex processes that cannot be understood from an analyst’s perspective or understanding that of their peers. That is, investors may not realize any of the possible economic or business reasons for their financial situation.
When investors buy or sell their stocks, some of these factors are important:
The price of a given asset class. This is the total return on equity that investors are getting. It varies between stocks, bonds, and government bonds. It is high enough to generate high performance as many financial analysts say. It is extremely high—much higher than any other asset class in that it is easy to sell (the “average value”) to the highest bidder, or to anyone who is willing to pay. It varies from year to year, and the market is divided into individual components that vary by market value. Investors don’t know this or what makes one good or bad investment because only about 13% of investors use the marketable securities of a major stock market.[4] Investors don’t know these correlations or whether they’re right—that is, they could be wrong by taking a few things into account before making a decision.
This is the total return on equity that investors are getting. It varies between stocks, bonds, and government bonds. It is high enough to generate high performance as many financial analysts say. It is extremely high—much higher than any other asset class in that it is easy to sell (the “average value”) to the highest bidder, or to anyone who is willing to pay. It varies from year to year, and the market is divided into individual components that vary by market value. Investors don’t know this or what makes one good or bad investment because only about 13% of investors use the marketable securities of a major stock market. Investors don’t know these correlations or whether they’re right—that is, they could be wrong by
However, the S&P 500 data can show you about the characteristics of real-estate market. As soon as the company is publicly traded, it is treated as a high risk investment (like, for example, one of our research firms (www.researchtense.com) would see investors investing in the highest value stocks of the future). This allows the S&P 500 to provide you with more information about the company and about market strength.[3]
So one could say that, to be an investor, the next step for you is to evaluate your company on a case-by-case basis. As with any investment, there are many options if you are an investor (see “Investor Compensation and Market Forecasting”). Some individuals will provide you with a financial reporting document which can be downloaded or distributed online in several ways. Many companies are willing to accept you and provide you with a form, the Form 1099, which is used to help
There is good earnings management and bad earnings management. Earnings management is bad when it becomes abusive, because at that point, it’s illegal according to the Securities and Exchange Commission (SEC). According to the SEC, abusive earnings management is “a material and intentional misrepresentation of results” (Investopedia.com). When the SEC sees that a company was involved in abusive earnings management, they usually issue fines but investors have already received the false numbers and made their decisions based on those numbers and there is nothing they can do to recover potential losses. Improper earnings management, or abusive earnings management, just does not happen on its own. Improper earnings management is seen as bad and unproductive. Most improper earnings management can be blamed on corporate management along with analysts and investors who have set high expectations for the company. Bad, or improper, earnings management is when someone actually intervenes with the financial reporting to hide the real operating performance of the company by creating artificial accounting entries or stretching estimates beyond a point of reasonableness. Disguising real operating trends with artificial and undisclosed accounting offsets is what makes up bad earnings management. Companies who participate in bad earnings management can often be found having hidden reserves, improper revenue recognition techniques and their accounting departments probably made either overly aggressive or overly conservative accounting judgments. Actions such as these are often illegal and constitute fraud and, at best, are considered bad business practices and will ruin the reputation of the company. Lastly, actions such as these are unproductive and create no real long-term value for the company, which should be the company’s ultimate goal. Earnings management isn’t always bad. There is also the other end of the spectrum, where good earnings management practices are found. Good earnings management techniques include “reasonable and proper practices that are part of operating a well-managed business and delivering value to shareholders.” Many companies participate in good earnings management, also known as operational earnings management, in their day-to-day activities. Some examples of good earnings management are setting reasonable budget targets, monitoring results and market conditions, reacting to all the unexpected threats and opportunities that arise and reliably delivering on commitments. A company has to participate in some sort of earnings management, and more than likely, it’s the good kind. A company participates in good earnings management because it has to set a budget and has to set targets. It has to organize its internal operations and have a way to motivate its employees. Lastly, company participates in good earnings management is because it provides a way to present information to its present and potential investors about their operations. Actions such as these that achieve stable and predictable results and positive earnings trends through good planning and operational responsiveness are not illegal or unethical in any way, its just part of business. All businesses try to reach their targets and try to continue seeing growth while responding to their competition and changes in the market. Good earnings management just allows the company to continue their operations with some type of goal to achieve or target to reach. This only becomes a bad thing when those goals or targets are not reached and someone starts making up the