ACCT 7021 Chapter : Chapter 11 Summary
Document Summary
Earnings management is the choice by a manager of accounting policies, or real actions, affecting earnings, so as to achieve some specific reported earnings objective. Earnings management can be viewed from both a financial reporting and a contracting perspective. From a financial reporting perspective, managers may use earnings management to meet analysts" earnings forecasts, thereby avoiding the management can be a vehicle for the communication of management"s inside reputation damage and strong negative share price reaction. Management may also use it to report a stream of smooth and growing earnings over time. From a contracting perspective, earnings management can be used as a way to protect the firm from the consequences of unforeseen events when contracts are rigid and incomplete. Earnings management through accounting policies can be divided into two categories, one is the choice of accounting policies and the other category is discretionary accruals.
