Managers’ Ethical Evaluations of Earnings Management and Its Consequences* ERIC N. JOHNSON, University of Wyoming GARY M. FLEISCHMAN, University of Wyoming SEAN VALENTINE, University of North Dakota KENTON B. WALKER, University of Wyoming 1. Introduction and motivation The purpose of this study is to investigate, in an experimental setting, how favorable versus unfavorable organizational consequences influence managerial responses to an employee’s earnings management behavior. We focus on the following question: Do the ends of positive organizational consequences justify the means of earnings management? Earnings management is defined as ‘‘the choice by a manager of accounting policies so as to achieve specific objectives’’ (Scott 2003: 369). Earnings management can be fundamentally classified as either accounting related, involving the manipulation of accounting records through aggressive or fraudulent applications of accounting principles, or operating related, involving choices made by management regarding the timing of investment or operating activities, with the result that reported earnings are influenced by these choices (Lev 2003; Cohen, Dey, and Lys 2008; Roychowdhury 2006; Gunny 2010).1 The effect of earnings management on the value of the firm and the related issues of financial-based incentives for managing earnings has been widely examined in the accounting literature (e.g., Healy 1985; Dechow, Sloan, and Sweeney 1995, 1996; Healy and Wahlen 1999; Fields, Lys, and Vincent 2001; Marquardt and Wiedman 2004; Das, Shroff, and Zhang 2009; see Ronen and Yaari 2008 for a comprehensive review of earnings management studies).
The case narrative describes a business scenario and a problematic performance measurement system. The case requirements ask you to apply performance measurement concepts to interpret production results, evaluate the company’s current performance measurement system, discuss the applicability of the balance scorecard framework for improving the current performance measurement system, construct a balanced scorecard for the company, and then effectively communicate the results of your analysis, evaluation, and recommendations in the form of a professional written memo. 1. Analyze standard cost variance results and deduce likely causes. 2.
(1) Earning Management According to Ronsner (2003), earning management is defined as a management technique that can let managers achieve their outcomes by influencing the financial statements. These actions will mislead some stakeholders’ opinion about the company’s underlying economic performance; Also, earning management can influence the contractual outcomes which come from accounting numbers (Healy and Whalen, 1999). In Worldcom case, CFO Sullivan use accounting entries to reach targeted performance, this improper earning management tried to conceal the real economic value and performance of Woldcom from the stakeholders who will use the financial statements. (2) Motivations of earning management The reason of earning management is to affect financial statements’ users’ understanding about the company’s economic performance or influence the outcomes which depend on the reported accounting numbers (Lin, Radhakrishnan & Su, 2006) Firstly, one of the most important motivations of earning management is Managers’ career concerns. Because earning management allows managers to reach their desired outcomes by influencing firm’s financial statements.
Cost of capital can help define the acceptability of investment opportunities. Besides, the cost of capital can scheme the corporate finance arrangement. Generally, the best way for designing the corporate finance structure is based on information of changing of the capital market. So, manager can figure out information like accounting reports and their cost of capital to market. By using the information, manager can use cost of capital for restructure the market price and earning per share in order to bring advantage for company.
The company inflated the assets and made the entries seem as though they had income. The Code of Professional Conduct of the American Institute of Certified Public Accountants establishes rules and principles for the accounting profession to follow. The actions that were taken by the executive team at Worldcom violated the guidelines that had been established to protect the industry, government and the public. Generally accepted accounting principles require that a company expense the lease costs as they
Additionally a closer inspection on the critique of his theory and a look at how his model can be complimentary to other strategic tools and as well as further developed in order for a firm to create a competitive strategy. The strategy in which a firm decides to adopt is important as it can help explain an individual firms success or failure in obtaining or sustaining competitive advantage. In Porter’s view an industries overall competitiveness and profitability are attributed to five different forces (Porter, 1979). These are (1) Competition in the Industry (2) Potential of New Entrants (3) Power of Suppliers (4) Power of Customers and (5) Threat of substitute powers. When looking at Porter’s five forces in relation to industry analysis, we see both the analysis of a tangible situation (customers, suppliers, and competitors) and on predictive developments (new entrants and substitutes) (Recklies, 2001).
Guillermo Furniture - Accounting Decisions In order to Guillermo to identify to make an informed decision about the direction to take his company they need to understand the audiences, purposes and natures of financial statements and managerial reports. In addition to this, the scope of the presentation will explain the use of financial accounting information so Guillermo can make those informed and ethical business decisions. Break Even Analysis At the heart of break-even point or break-even analysis is the relationship between expenses and revenues. It is critical to know how expenses will change as sales increase or decrease. Some expenses will increase as sales increase, whereas some expenses will not change as sales increase or decrease.
As a preparer of financial statements, management will want to produce an income statement that shows a profit (profit maximization motive). The main financial statement users are bankers, shareholders, and potential shareholders. Users will want statements that reflect the performance of management (stewardship) and predict the company’s ability to pay dividends and make loan payments (cash flow prediction). The ethics of the accountant are an issue here, as
Contents Task 1: Understand the relationship between organizational structure and culture. 2 P1.1: Compare and contrast different organisational structure and culture. 2 P1.2: Explain how the relationship between an organizations structure and culture can impact on the performance of the business. 7 P1.3: Discuss the factors which influence individual behaviour at work: 8 Organizational structure and Culture of Sainsbury and Tesco 9 Task2: Understand different approaches to management and leader 12 P2.1: Compare the effectiveness of different leadership style in different organizations. 12 P2.2: Explain how organizational theory underpins the practice of management 13 P2.3: Evaluate the different approaches to management used by different organizations.
AO1 – Explain and interpret features of a business organisations profit and loss statement In this report I will be analysing and writing about Whitbread PLC’s 2001 to 2002 and 2002 to 2003 profit and loss statements. In this report I will also be explaining and analysing the features of a profit and loss statement such as: * Turnover * Expenditures * Cost of sales * Gross profit * Opening and closing stock * Materials * Depreciation * Group operating profit * Net/Profit loss on disposal of fixed assets * Profit and loss before interest * Profit and loss before tax * Profit and loss after tax * Profit and loss for ordinary shareholders * Retained profit What is a profit and loss statement? A profit and loss statement is a financial statement which summarises what comes and goes in and out of the business account over a specific period. Monthly or annually is the most common period of time in which a profit and loss statement can be done. What’s the purpose of a profit and loss statement?