Is Income Smoothing Ethical?

1100 Words5 Pages
Executive summary The performance of a firm is most frequently measured by their accounting earnings. What the performance statistics show are of major interest to management, employees, suppliers, investors, customers, the public, and regulators. (Prior, Surroca, & Tribó, 2008) To better distinguish themselves from poor performers, better-performing firms look to financial reporting to facilitate stakeholders to make financial decisions. In an attempt to control fluctuations in reported earnings, firms often use a type of management accounting behavior called income smoothing to steer earnings to levels they consider desirable. In addition, an inherent conflict of interest exists when management, which has the responsibility for preparing financial reports, cannot impartially report on its own achievements. In this case study, we consider the possibility that a Publicly Traded Company’s (PTC) auditor discovered in the firm’s financial statements activities that were masking economic realities through active manipulation of earnings. We will discuss current income-smoothing strategies and tackle the issue of whether they are ethical. Data included in our research will provide the Board points to consider when determining the standards to follow regarding policies of income smoothing at PTC. It should also be considered that managers in the financial reporting department may feel their positions are contingent on positive earnings results. It will also provide recommendations based on examples of reactions of key stakeholders in similar circumstances. Background What are the ethical issues the senior management team of PTC should address relative to managing (smoothing) earnings through accounting manipulations to influence stock price, and what process(es) should the senior management team use to address those issues? In the 1980s, a significant
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