management case study

ACCOUNTING FRAUD AND EARNINGS MANAGEMENT

1 .0 INTRODUCTION

In the present complex business environment the managers of the companies work always with the twin objectives of profit maximization and cost minimization . To achieve higher earnings they resort to all possible techniques and increase the revenue of the company . However sometimes , due to compelling circumstances the managers tend to present a rosy financial picture of their companies in the eyes of the shareholders and the prospective investors in the stocks of the companies . Since ownership of companies is distinguished from the

control , there always is a tendency to manipulate the accounts and present better financial statements for the information of the shareholders and stakeholders of the company . The Agency theory of separation of management and control always has the risk of managers acting in their self interest against the interest of the company . Some of these manipulations take the form of `Accounting Frauds ' and some of them are characterized as `Earnings Management , where the line segregating them is very thin . In this we will try to analyse both the terms and find out the interrelationship between them

2 .0 EARNINGS MANAGEMENT

Before we start to define the earnings management and differentiate the term from `Accounting fraud , it is important to know what we actually mean by `earnings . In general terms , earnings are the profits of a company which acts as a base for any decisions concerning the investments in the stocks of a company . Investors and analysts look to earnings to determine the attractiveness of a particular stock Companies with poor earnings prospects will typically have lower share prices than those with good prospects (Article : What is Earnings Management ? Pp1 para 1 ) Earnings Management is a strategy used by the management of a company to deliberately manipulate the companies earnings so the figures match the predetermined target . This practice is carried out for the purpose of `income smoothing (Article : What is Earnings Management ? Pp 1 para 2 ) In to have uniform earnings instead of exceptionally good or bad earnings through the accounting periods , the companies will try to add or remove cash from reserves accounts . This practice is known as Earnings management . It must be remembered that whatever be the methodology used by the managers the driving force behind managing earnings is to meet a particular targeted earnings

3 .0 ACCOUNTING FRAUD

`Accounting fraud ' can be described as a game of nods and winks practiced by managers , auditors , and analysts who operate in a gray area where the accounting is being perverted ' The result of this game ' was an environment where integrity in financial reporting is under stress ' and , in some instances , earnings reports reflect the desires of management rather than the underlying financial performance of the company (Richard B . Zabel and James J . Benjamin Jr 2002 Pp 1

Sometimes they adopt simple strategy of deciding to overlook the manipulation hoping that no one would notice such manipulation and there is no risk of getting caught . Such an act...