Question

In your opinion, why do managers manipulate earnings, and how or why is anyone hurt when earnings are manipulated?

Answer 1

Major Reasons of why managers manipulate earnings.

1.Managers Face Very Little Accountability

2.Depend upon their jobs and bonus

3. Managers want to lower the bar.

Managers face much blowback when they misstate earnings, either from regulators or the investing public. On the regulatory side, enforcement is so weak that they rarely even have to give back the bonuses they earned from false earnings.

Managers get paid massive bonuses for hitting growth targets, and then when it’s revealed they didn’t actually hit those targets, they get to keep the bonuses anyway! So much for being aligned with shareholder interests.

Investors and analysts don’t do much better. Sell-side analysts, who have a vested interest in maintaining a good relationship with the companies they cover, don’t tend to probe too deeply into reported earnings.

if a Manager is on track to beat their target by a wide margin, they might actually want to decrease their earnings, thereby setting up an easy competition in the following year. One of the most common tactics for accomplishing this goal is to increase reserves. Managers can decrease earnings by inflating reserves.