Earnings Management: The Continuum from Legitimacy to Fraud

Earnings Management: The Continuum from Legitimacy to Fraud

Introduction

When organizations invest in projects, they want to reap the benefits, both tangible (e.g. financial) and intangible (improved image of the organization, for example). It is therefore; important to plan as accurately as possible, for any system development project, costs and benefits of its development and its ongoing costs once the system is implanted (Roychowdhury, 2012). Earnings sometimes are called as the “bottom line” or “net incomes,” which are the single most important item in financial statements. They indicate the extent to which a company has engaged in value-added activities. A wide variety of Illegitimate and legitimate actions that affect earnings of the entire entity are covered with term earning management. They are a signal that helps direct resource allocation in capital markets.

Statement of Problem

The primary objective of the study is to investigate the effect of accounting choices on earning management. Additionally, we are going to discuss earning management and fraud. This paper will focus on standards of a profession that define the responsibilities of auditor and provide assistance to auditor on recognizing the fraud. In addition, this paper shall be focusing on quality of earning, earning management, and the relationship of earning management to the constitution of fraud.

Statement of Purpose

The purpose of this quantitative study is to identify the investigate how the different choices of accounting methods in an organization can have positive or negative influence on the end results for that particular organization. This would in turn be helpful to identify the importance making the appropriate choice in this regard. Furthermore, through the results of this study, organizations would then be able to appropriately select the best possible alternative in regard to the different choices available in the different accounting methods. Responses would be gathered by interviewing several financial employees of different organizations, along with interviews from their heads. The responses that would be gathered would, in turn, prove to be helpful in drawing the results of this particular study.

Earning Management

Earnings management is to adopt from the outset of a project a holistic approach that covers the costs and benefits throughout the life of the future to ensure that benefits the organization will be expected to go once the implanted system (McNichols, 2011). The definition of earning management ranges legitimate managerial activities at one end to spectrum to fraudulent financial reporting at the other end. ...