Memo on Earning Management Abuse
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In "The Numbers Game", a speech in September, 1998 by Arthur Levitt, the Chairman of the Securities and Exchange Commission, concern was expressed over the stress using integrity in financial reporting. The intense pressure on corporate managers to meet Wall Street earnings predictions is causing a decrease in the quality of financial reporting. This pressure in turn causes corners to be cut as well as some creative financing to be born. Commonly acceptable practices are now being undermined by companies operating in the gray area.
In business today there have been many ingenious ways to report false financial reports to stay in the public spotlight. Earnings management has been a tool commonly used to exaggerate these reports. While a lack of understanding may be to blame for some of the misuse that takes place in business, the SEC claims that with the SEC Staff Accounting Bulletin number 99 "guidance for preparers and independent auditors on evaluating" is available, thus providing skepticism about management's motivation for meeting revenue expectations" (Grant et al., aicpa.org). With consequences in mind, the financial community needs to ask how s earnings management defined and how and why earnings management abuses take place...