Morality of Management Earnings Essay Example for Free

religion of Management Earnings EssayThe term Earnings Management is a form of number smoothing use by a conjunctions centering to manipulate or influence the companys dinero to advert a pre-determined dollar amount. This is done in an attempt to keep financials stable, as opposed to delivering financial fluctuations. When a company appears to be stable it has a greater chance of attracting investors, which in turn demands higher(prenominal) shargon prices. When a company is able to have higher sh ar prices, the more(prenominal) likely they are to draw new investors. Likewise, a company that has low share prices is often a reflection of a company that is not doing well financially (Investopedia, 2009, para 2). Often, companies perform abusive earnings management practices in an effort to betray the numbers racket (Inevestopedia, 2009, para 4). In disposition to do this, management whitethorn be tempted to make up numbers as a means of drawing investors or to make their company appear financially stronger than what it actually is.The methods used in earnings management can be varied, and may be done through handling of financial numbers or operating procedures (As cited by Gibson, 2013, p. 84). In a study conducted by the National Association of Accountants, a questionnaire was prepared which described 13 find earnings management situations (As cited by Gibson, 2013, p. 83). Below are five listed generalizations that can be made by the study findings regarding short-term earnings management practices. 1. Respondents of the survey mat up that earnings management practices utilizing accounting methods to be less acceptable than methods of operating procedure manipulation (As cited by Gibson, 2013, p. 84).Manipulation of operations can include something as simple as pushing shipping to the last day of the fiscal quarter or asking customers to take early delivery of goods (As cited by Gibson, 2013, p. 85). Another example is when companies make Un usually hypnotic terms to customers or Deferring necessary expenditures to a subsequent year (Rosenzweig Fischer, 1994, para 5). According to survey responses, practitioners had few ethical dilemmas when using operational earnings management manoeuvre compared to those involving accounting methods (Rosenzweig Fischer, 1994, para 7). 2. When it came to accounting, survey respondents matte up that increasing earnings reports to be less acceptable than the decreasing of earnings reports (As quoted by Gibson, pg. 84). Managers appear to be more comfortable in reducing the overall company acquire when reserves show high-sounding numbers (As cited by Gibson, p. 85).It would seem that management might assume that if their reserve numbers are high, because reducing them to show lessor profitability acceptable. If the money is genuinely there, then what is the harm in reducing the profit amount to ensure a designated number? However, when it came to reporting profit increases, manag ers were hesitant in determining what earnings management methods would be ethical and which would not. 3. Generalization 3 is similar to generalization number two where morality are concerned. Respondents tangle that if earnings management tactics were kept small that it was more acceptable than if the effect were large (As cited by Gibson, p. 84). When manipulations of numbers or operating procedures are kept to smaller changes, managers seem to tonus it more justifiable and acceptable.For instance, if management were asked to show an increase of sales by $12,000.00, such manipulations would be more ethical than if asked to increase sales by $120,000.00. Likewise, if production costs were delayed for advertising to meet a quarterly budget it would be more acceptable than if production costs for advertising were delayed to meet the end of year fiscal budget. This also ties in to generalization 4, the time period of the end effect. 4. clock periods play a large part in determi ning how ethical earnings management practices are. As described above, when asked to alter numbers or operating procedures in an effort to make quarterly forecasts, managers seemed to opinion this practice to be more acceptable.When asked to alter numbers or operating procedures for annual reports, however, the line amongst ethical and questionable is blurred. 47% of respondents to the survey felt that earnings management practices that were made to meet an slowdown quarterly budget to be ethical, while only 41% felt that such manipulations in order to make an annual budget to be ethically sound (Ascited by Gibson, 2013, p. 85). 5. When asked whether it was acceptable to suggest specific extended credit terms to customers in an attempt to increase profits, only 43% of survey respondents felt the practice to be ethical.However, when asked if the same end result would be ethical if achieved through ordering overtime to ship as much product as possible at years-end, 74% of respo ndents felt this manipulation to be ethical (As cited by Gibson, 2013, p. 85). A staggering 80% of survey respondents felt that selling spare assets as a means of realizing a profit to be ethical, while only 16% felt it would be questionable (As cited by Gibson, 2013, p. 85). Short-term earnings management procedures, while questionable, are often legal. The renewing of financial information in an attempt to meet budgets or as a way to show profitability is often alluring and an easy way to draw investors. Managers who use earnings management tactics moldiness take into consideration the impact such actions may have with key stakeholders (As cited by Gibson, 2013, p. 86).When numbers are skewed favorably, it gives stakeholders a false sense of security in their investments. Companies who engage in short-term earnings management practices often set themselves up for losses over time. When numbers are alter to make a quarterly or yearly dollar amount, chances are the following quar ter provide find the company in the negative. Such practices are rarely foolproof and care must be taken when making earnings management practice decisions. Focusing on long-term earnings management practices are ultimately more favorable, but in order to be effective management must remain committed to consistent operational procedures.Forecasting the product needs of customers and looking ahead are key strategies for keeping sales income at a consistent level. Waiting until the last minute to offer customers generous credit terms in an effort to boost end of year or quarterly sales is a short-term answer at best. Looking at the purchase history of customers and combine theses sales number into future budgets should help alleviate the need to resort to last minute scrambling to make budget targets.