Morality of Management Earnings Essay Example for Free

Morality of Management boodle EssayThe term Earnings Management is a form of number smoothing used by a companys attention to manipulate or influence the companys honorarium to delay a pre-determined dollar amount. This is done in an attempt to keep financials stable, as opposed to armying financial fluctuations. When a company appears to be stable it has a greater chance of attracting investors, which in turn demands higher sh be prices. When a company is able to have higher sh be prices, the more likely they atomic number 18 to draw new investors. Likewise, a company that has low share prices is often a reflection of a company that is not doing well financially (Investopedia, 2009, space-reflection symmetry 2). Often, companies perform abusive earnings management practices in an travail to make the numbers (Inevestopedia, 2009, para 4). In order to do this, management may be tempted to make up numbers as a means of drawing investors or to make their company appear fin ancially stronger than what it actually is.The methods used in earnings management can be varied, and may be done through manipulation of financial numbers or operating procedures (As cited by Gibson, 2013, p. 84). In a study conducted by the National Association of Accountants, a questionnaire was prepared which described 13 observed earnings management situations (As cited by Gibson, 2013, p. 83). Below are five listed generalizations that can be made by the study findings regarding short earnings management practices. 1. Respondents of the survey snarl that earnings management practices utilizing accounting methods to be less acceptable than methods of operating procedure manipulation (As cited by Gibson, 2013, p. 84).Manipulation of operations can include something as simple as pushing transferral to the last day of the fiscal quarter or asking customers to take early delivery of goods (As cited by Gibson, 2013, p. 85). Another example is when companies make Unusually taking terms to customers or Deferring necessary expenditures to a subsequent year (Rosenzweig Fischer, 1994, para 5). According to survey responses, practitioners had fewer ethical dilemmas when using operational earnings management tactics compared to those involving accounting methods (Rosenzweig Fischer, 1994, para 7). 2. When it came to accounting, survey respondents felt that increasing earnings reports to be less acceptable than the decreasing of earnings reports (As quoted by Gibson, pg. 84). Managers appear to be more comfortable in reducing the overall company gather when reserves show elevated numbers (As cited by Gibson, p. 85).It would seem that management mogul assume that if their reserve numbers are high, then reducing them to show lessor profitability acceptable. If the money is genuinely there, then what is the harm in reducing the profit amount to meet a designated number? However, when it came to reporting profit augments, managers were hesitant in determining what earnings management methods would be ethical and which would not. 3. Generalization 3 is similar to generalization number two where ethics are concerned. Respondents felt that if earnings management tactics were kept small that it was more acceptable than if the make were large (As cited by Gibson, p. 84). When manipulations of numbers or operating procedures are kept to smaller changes, managers seem to feel it more justifiable and acceptable.For instance, if management were asked to show an increase of sales by $12,000.00, much(prenominal) manipulations would be more ethical than if asked to increase sales by $120,000.00. Likewise, if production costs were delayed for advertising to meet a quarterly budget it would be more acceptable than if production costs for advertising were delayed to meet the end of year fiscal budget. This also ties in to generalization 4, the time period of the end effect. 4. Time periods play a large part in determining how ethical earnings management practices are. As described above, when asked to alter numbers or operating procedures in an effort to make quarterly forecasts, managers seemed to feel this practice to be more acceptable.When asked to alter numbers or operating procedures for annual reports, however, the line between ethical and questionable is blurred. 47% of respondents to the survey felt that earnings management practices that were made to meet an stave quarterly budget to be ethical, while only 41% felt that such manipulations in order to make an annual budget to be ethically sound (Ascited by Gibson, 2013, p. 85). 5. When asked whether it was acceptable to offer special extended credit terms to customers in an attempt to increase profits, only 43% of survey respondents felt the practice to be ethical.However, when asked if the same end result would be ethical if achieved through ordering overtime to ship as much product as possible at years-end, 74% of respondents felt this manipulation to be ethical (As cit ed by Gibson, 2013, p. 85). A staggering 80% of survey respondents felt that selling extra assets as a means of realizing a profit to be ethical, while only 16% felt it would be questionable (As cited by Gibson, 2013, p. 85). Short-term earnings management procedures, while questionable, are often legal. The alteration of financial information in an attempt to meet budgets or as a way to show profitability is often alluring and an easy way to draw investors. Managers who use earnings management tactics must take into consideration the impact such actions may have with key stakeholders (As cited by Gibson, 2013, p. 86).When numbers are skewed favorably, it gives stakeholders a false sense of security in their investments. Companies who engage in short-term earnings management practices often set themselves up for losses over time. When numbers are adjusted to make a quarterly or per year dollar amount, chances are the following quarter will find the company in the negative. Such pr actices are rarely foolproof and care must be taken when making earnings management practice decisions. Focusing on long-term earnings management practices are ultimately more favorable, but in order to be effective management must remain committed to consistent operational procedures.Forecasting the product needs of customers and looking ahead are key strategies for keeping sales income at a consistent level. Waiting until the last minute to offer customers generous credit terms in an effort to boost end of year or quarterly sales is a short-term answer at best. Looking at the purchase history of customers and incorporate theses sales number into future budgets should help alleviate the need to resort to last minute scrambling to make budget targets.