Question

Why might companies engage in earnings management. When does earnings management become fraud. And legally is earnings management like a misrepresentation?

Answer 1

As for an investor, they always looked for those companies which shows steady earnings / profits ; so that they can invest in those companies without tension of low profit / fluctuating profits. Companies do earnings management inorder to show their financial position steady and fair profits. Its actually showing a good picture of company within the boundaries of GAAP(Generally Accepted Accounting Principle)

For eg; Company can change their depreciation policy from WDV(Written down value method) to Straight line method(Fixed rate method) / vice versa , inorder to present more profit by decreasing depreciation expenses. NOTE : If company changes policy, then they have to mention it in the statement of financial position(balance sheet) as a FOOT NOTE.

Earnings management becomes fraud when management tries to manipulate the financial statement to get more investors by uplifting profits/earnings beyond GAAP.

We can't completely agree as misrepresentation, but it is done intentionally by the managers to show good and steady profits.