Can Earnings Management Be an Ethical Practice - Essay Example

EARNINGS MANAGEMENT AS AN ETHICAL PRACTICE Name: Course Instructor’s name Institution Date EARNINGS MANAGEMENT AS AN ETHICAL PRACTICE Earnings management may be defined as any action on the part of the management which affects reported income which does not benefit the organization economically even if it may seem to be very important to the organization in the long run (Merchant and Rockness 1994). It occurs when managers use the reports on finance to structure the business transactions in a way that changes these reports to misinform stakeholders on the performance of the organization or to get contracts which highly depend on the report on finance of a company (Luippold et al., 2015). Whether or not managing earnings by the use of accounting methods is an ethical practice or not is a very important subject ,Managers often disagree on the subject others consider it acceptable while others consider manipulating earning via operating decisions more ethically acceptable than manipulating it by accounting methods (Bruns and Merchant 1990) Earnings managements can be an ethical practice and the earnings figures should not be as a result of manipulations and should have high integrity so as not to falsely raise the company’s income. Reliability should be key pointing to earnings quality presently and also the earnings in the future (Eaton and Giacomino, 2000). There are many categories of earnings management actions, According to Merchant and Rockness (1994) two of these factors involve manipulation of accounting and two involve operating decisions that are designed to influence the earnings as reported. The accounting factor involve those actions that determines earnings by changing the methods of accounting methodology while operating decisions entails deferring useful expenditures to the following year or offering very attractive conditions to clients at the end of the year to pull back the sales of the next year into the present year. Even though the accounting practitioners usually rate accounting manipulation as a method that seems to be less acceptable ethically than operating decision manipulating, the manipulation of inventory is just as questionable ethically as all the other forms of accounting manipulation. Though there are few qualms from the practitioners on operating decision manipulation, this is a clear violation of general principles of accounting. The fact that in the accounting profession there are no explicit standards against operation manipulation does not make it any more ethical than accounting manipulation. Considering the sort of decisions stakeholders make in light of reported earnings both accounting and operating manipulation can be destructive to their interests since the stakeholders always depend on the financial statements to make decisions. Because of the distortion earnings management is an illegal practice. Information that is relevant to the users should be provided and at all times it should be reliable and honest information so that it does not lure the user in making poor decisions on investment (Rosenzweig and Fischer 1995) Regardless on the people who are affected by the earnings management the information should always be honest and with utmost ethics. Most companies if not all, conduct their earnings management providing information that is true about the organization. The most useful information is that which is gotten from the long-term earnings because the information which is gathered within a short time may be misleading and the users may misunderstand the information and make misguided information .Such practices can be immoral or unethical (Luippold et al., 2015). Management of short-term earnings in almost all organizations should be an ethical practice as any slight deviation in accounting may cause fraudulent in the reporting that may give false information to the users of this information. A company should not only be conscious of the code of conduct but also practice earnings management in an ethical manner (Cowton, 2009). There are forms of earnings management which are legal and do not violate the code of conduct. Good earnings management is reasonable and the practices are acceptable and are an indication of running a well-managed organization that gives the shareholders desired value. Bad earnings management on the other hand usually perform artificial entries of accounting and make large estimates that are unreasonable .The good earnings management is a mark of best skill and excellence that the market is in need of and rewards .(Barton et al..2010). Though in some companies their concern for the bottom line looks more important than the concern for ethical values (Verschoor 2002) Various methods such as allowable discretion are employed by the managers of some companies to ensure that earnings are boosted or lowered by some small percentage (Durfee 2006).These practices usually degrade the quality of earnings and financial reporting and this consequently deceive the users of the financial statements, be it the public or the Government. Accounting policies should always be followed strictly. Though for a company’s failure to accounting and auditing many factors come into play which include personal values, integrity, and ethical practices. As scandals escalate among public companies, people and not just accounting is the reason why there are major losses that befall individuals who are innocent. Where people are to blame, it can be assumed that these are the people with poor ethical values and integrity (Akers et al.2004). Although there exist a professional code of conduct that deals with the professions such as accounting, the behavior of a person is affected greatly by his or her personal values (Eaton and Giacomino 2000). Therefore, just by the fact that one has a code of conduct or the organization follows a specified code of conduct is not just good enough .It may be argued that any form of earnings management is unethical if earnings management is viewed as a deliberate misrepresentation of the company’s true financial position with the purpose to escalate managers' remuneration. However, it is believed that people hold a more subtle view and consider earnings management as ethical if the methods used fall within GAAP and the objectives are not opportunistic to managers but rather equitable to the entity's other stakeholders. Organizations that do not adhere to the code of conduct or the ethical practices should be brought to book. The media to ensure it reports matters concerning such illegal practices in earnings management It should be emphasized to be put in accounting schools and also all the ethical practice pertaining earnings management to be taught in business academic institutions ( Fischer and Rosenzweig 1995). Personal values determine and mostly influence behavior, the kind of Curriculum University teach their students may change the students' values to do what is right. Programmatic activities, internally and externally, may be used by a university in programs of accounting that emphasize on ensuring the society has achieved the set standards and goals. Courses that seek to build individual values should also be introduced to help change student behavior (Akers et al. 2004) Some of the curriculum activities that are relevant to ensure that there is change in the way students become more accepting to the earnings management techniques and also ensure there is ethical practice include: Use of examples, orienting the students to services like charity activities, emphasizing on the social service aspect. Ensure that the students are aware on their purpose in the development of a society and that they have a moral obligation to practice ethics in the earnings management. Ensure that student understand that their profession require them to assist society. It is possible to ensure that this is done in all institutions that train accountants and business managers since values can influence the behaviors and help show how important ethical values are in n individual’s profession. (Eaton and Giacomino, 2000). Individual ought to realize that there are many effects that come as a result of distortion earnings management information especially to the users of this information. Management accountants need to know they are held responsible for their organizations for the integrity of the financial reporting system and that they have a stake in the implementation procedures of the company to deter earnings management by way of operating decisions and any distortion reflects negatively the performance of a management accountant. There are a couple of things that ought to be done that can help accountants and managers become more aware of how manipulation of earnings management can lead to adverse effects. For example, the company could plan workshops and seminars about ethical practices and awareness. Company recruitment policies to be reviewed to ensure employees who are sensitive to the earnings management ethical practices adopt ethical codes in the institution and ensure that they are practiced to the latter and also ensure the operating manipulation has been monitored by use of stern procedures (Fischer and Rosenzweig 1995) Earnings management is a very important ethical concern due to its capability to destroy reported earnings and mislead users to information on finance of an organization, individual practitioners, their companies, and professional associations should take steps to take note and prevent this practice (Fischer and Rosenzweig, 1995). Reference List Cowton, C. (2009). Accounting and the ethics challenge: Remembering the professional body. Accounting and Business Research, 39(3), pp.177-189. Eaton, T. and Giacomino, D. (2000). Personal values of business students differences by gender and discipline. Research on Accounting Ethics, Vol.7, pp.pp83-102. Fischer, M. and Rosenzweig, K. (1995). Attitudes of students and accounting practitioners concerning the ethical acceptability of earnings management. ” Journal of Business Ethics, Vol.14(No 6). Glacomino, D. and Akers, M. (2006). The ethics of managing short-term earnings: business managers and business students have few problems with earnings management practices. Luippold, B., Kida, T., Piercey, M., and Smith, J. (2015). Managing audits to manage earnings: The impact of diversions on an auditor's detection of earnings management. Accounting, Organizations and Society, 41, pp.39-54. Merchant, K. and Rockness, J. (1994). The ethics of managing earnings an empirical investigation Journal of accounting and public policy. Vol.13, pp.pp. 79-94. . Read More