Question

If you argue that earnings management (up to a certain level) is necessary in order to allow managers to convey information via the accruals. Why is this the case?

Answer 1

No , if it required to be yes with proper suppoting document but same should be upto a certain level only not above that benchmark. for example, firm will report Net income and Cash inflow difference of upto 20pc or 15pc provided the documentation or third party confirmation as addendum. As we have faced the crisis amid of 1990s and 2000s shows the earnings management accounting tools used by the firms to elevate their earnings lead to fall back of market in drastically.

Understandability of Earning Management: Earning Management is the accounting tool used for presentation of financial statement. Two factors motivates management for the same

- Senior Level Management their's own reputation in market

- Meeting Stakeholders demand or expectations

these two are the only factors which force management for drawing earning management. It is nothing but a difference of Net income and cash flow within an organisation.

It simply overpopulate the financial position and meet the analyst benchmark percentile of performance.

If Same is not deployed not even a single cent then benefits are

- True and fair view of the Financial Statement of the Organisatin

- SOund Decision making by the prospective decision maker

- Keep Control over the Auditors non ethical practices of " Non - Audit Consulting services"

- Improve firms ability to look for earning potential within the organsiation

- Financial Statment are more reflective in nature.

At the end, it can be concluded that Not Applicability is best for the market but applicability to certain extent which it will not turn the industrial market into poisionous fall back , then it is agreed to bring back the same.