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In: Accounting

State and explain two motivating factors for corporate management for the earnings management

State and explain two motivating factors for corporate management for the earnings management

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Expert Solution

Earnings management is defined as the use of the accounting technique to show a financial statement that shows a positive view of business activities of a company. In simple terms it is a method of manipulating a company's financial records. It is done to have a good appearance of a company financial position. With it companies show consistent profits and a smooth earning.

Two motivating factors for corporate management for the earnings management are:

  • Preference for more stable earnings: Earning management involves manipulating the company's earnings so that pre-determined target can be earned. By using this company's can show a stable earning to show that management is carrying out income soothingly.
  • Need to maintain the level of certain accounting ratios: Another factor is that the companies need to maintain the ratios at certain level so as to show that the company is in good shape. A company needs to maintain the level of certain accounting ratios due to its debt covenants, etc. Also there is pressure on the companies to have and maintain an earning that is increasing and also to beat the target set by various analyst.

ekkarill92 answered 1 year ago
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