Earnings Management and Its Implications

Abstract

In the wake of continuing, highly publicized financial frauds and failures, the accounting profession has placed renewed emphasis on issues related to earnings management and earnings quality. Staff Accounting Bulletin 101, Revenue Recognition in Financial Statements, which was issued in December 1999 in response to the Committee of Sponsoring Organizations of the Treadway Commission report, illustrates the importance of earnings to the SEC. The SEC and the public are demanding greater assurance about the quality of earnings. Notwithstanding the grave threat that abusive earnings-management practices pose to the reliability and accuracy of financial statements, the accounting profession may be reluctant to address this issue. While there is evidence that accounting educators are attempting to make accounting students aware of abusive earnings-management practices, further efforts are needed by state societies and public accounting firms to better equip CPAs with the tools necessary to identify earnings-management techniques. Education could help to reduce the expectations gap between auditors and financial statement users.

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