Reported earnings or actual earnings Essay Example | Topics and Well Written Essays - 2750 words

Reported earnings or actual earnings - Essay Example Companies employ accountants to make financial reports. Thus, from the perspective of accounting, what can we say on the situation? Are accountants being used by banks to misstate company profits? On a related point, how do we assess the â€Å"earning management techniques† with regard to their potential to be used by companies to understate company profits? In relation to the said issues, what do the professional ethics for accountants require for accounting professionals on the matter? What are some of the relevant literature on the issue? II. Literature review Some of the relevant materials on the subject matter being addressed by this work were the works of Mitre and Rodrigue (2002), Turner and Wheatley (2003), Laux (2003), and Lev (2003). Mitra and Rodrigue (2002, p. 185) defined earnings management as management’s â€Å"intentional and opportunistic manipulation of financial reports for personal gain†. According to Mitra and Rodriguqe (2002, p. ... 185) clarified that earnings management does not always a negative connotation because management may have implemented an earnings management to provide a conservative or more realistic earning figures based on the GAAP or Generally Accepted Accounting Principles. Mitra and Rodrigue explained (2002, p. 185) that opportunistic behaviour arise from earnings management because it is empirically difficult to differentiate earnings management that is opportunistic from what is done in the interest of a conservative portrayal of the company situation. The Mitra and Rodrigue (2002, p. 185) assessment is that management or researchers â€Å"generally take an opportunistic perspective† in view of the difficulty of separating legitimate from what is illegitimate in earnings management. Turner and Wheatley (2003, p. 61) acknowledged that current accounting principles, auditing standards, and SEC reporting regulations allow managers to implement an â€Å"inappropriate earnings management †. To support their claim, the authors identified 34 companies that published financial misstatements but which also corrected the misstatements a year later (Turner and Wheatley 2003, p. 61). According to the authors, management subsequent â€Å"correction† of â€Å"astute control over the creation of a misstatement† benefits a company just as a misstatement may have been deliberately made in the interest of the company. The authors narrated that the Financial Executives Research Foundation reported that the number of companies restating published financial statements due to an error were higher than earlier figures: the figure of 464 for the 3-year period 1998-2000 for the United States was higher than the earlier 10-year period (Turner and Wheatley 2003, p. 61). Turner and