Question

Discuss property the importance of earnings management, and the role that ethics plays in its reporting. What policies and internal procedures would you consider being the minimum necessary to instill confidence in earnings reports? How and why would you supplement those?

Answer 1

Answer is as under :

Discuss property the importance of earnings management, and the role that ethics plays in its reporting.

Ethics : It means principles, values, code of conduct that are observed from person to person and which governs the fundamental behaviour of human being. It differs from person to person. What is considered as ethical for one person might be unethical for some other person. Reporting of the companies profitability and many other important financial data is part of ethics of the companies management. Many times , the management of company intends to hide true position of the companies profitability and hence it is term as bad earning management. Managerial intention is often unknown to financial statement users, there’s somewhat of a “knowledge gap” that exists between the managers who know the purpose of their accounting decisions and the users of the statements who are not aware about the underlying reporting decisions.

Three factors that might affect the good ethical conduct for earning management and reporting the same to external and internal stake holders are as under :

1) Individual approach : Whether to behave ethically or not is a person own call. He or she will behave as per the situation, there personal thinking. Hence whether to report a particular transaction in financial statement or not to report the same is personal and individual ethical call

2) Conflict of interest means personal and public interest. A person need to differentiae between personal and Public interest base on there ethics

3) Opportunities : When a person have opportunity to do fraud but it depend on his or her ethical behaviour

What policies and internal procedures would you consider being the minimum necessary to instil confidence in earnings reports?

Following policy and procedure are considered to be minimum necessary to instil confidence in earning report

1) Management of the companies are required to follow the require dement as stated under Sarbanes Oxley Act ,2002 in which all internal control policy which should be adopted by companies management should be are stated.

2) Companies should appoint a independent auditor who will issue the financial statement

3) Companies should compulsory have on board independent CFO and CEO who will view financial and operational transactions separately from companies related personnel

4) Financial statement should be prepared accounting to accounting rules and regulation strictly and deviation from the same should be acknowledge to the user of financial statements.

5) Any change in main business or top management of the company should be communicated to the user of the financial statements

If the above points are taken care of as basis internal control, then it help to instil confidence in earning reports