The management of earnings is a topic that has raised many eyebrows in the accounting industry. With the amount of scandals in the last decade, the methods of managing earnings have become very important to investors. Although it is not fraudulent activity it is the manipulation of numbers. From this it is obvious that a "grey" area ca develop. It is this grey area that questions whether these manipulations are performed out of self-interest or for investor benefit. Although there are arguments that indicate this practice is beneficial it is by belief that manager's ability to manage earnings is important to their ability to provide information about future cash flows and should be impaired. This paper will provide illustrations that support the position that earnings management creates information asymmetry, generates a lack of reliability, and creates a grey area of ethical conduct.
Information asymmetry is createdArguments may reveal earnings management as reduces information asymmetry. This occurs because insider information is actually revealed to the investor. Along with this decrease in information asymmetry more efficient contracts are created. However, this does not portray the big picture. Earnings management gives managers the means to perform manipulation of earnings through operational or financial means. Disclosure is not a requirement and therefore creates the problem of whether stakeholders will be aware of this manipulation. Markets are not efficient and therefore disclosure is necessary to portray adequate information.
Without this disclosure we bridge a gap between investors. Large investors may have an advantage over smaller investors. Larger investors will have the means to incur the additional costs associated with finding this information. Therefore, investors are not provided with adequate information to make investment decisions.
Reliability: Quality over quantityQuality of information increases reliability and therefore is most important to investors. Studies have indicated that...