Managing Earnings

After reading case 2-2 in your text, “The Dangerous Morality of Managing Earnings,” write an essay that includes the following elements: A formal introduction. Discussion of the five generalizations from the findings in this study relating to managing earnings. Note: Do not simply restate the generalizations. You are being asked to discuss each in the context of professional experiences or examples given in the case itself. Discussion of management’s ability to manage earnings in the long term given the operational manipulations discussed in the case. Your submitted paper should be at least 2-3 pages long following APA style, and properly referenced. Case Study: “The Majority of Managers Surveyed Say It’s Not Wrong to Manage Earnings Occasionally, the morals and ethics executives use to manage their businesses are examined and discussed. Unfortunately, the morals that guide the timing of nonoperating events and choices of accounting policies have largely been ignored. The ethical framework used by managers in reporting short-term earnings probably has received less attention than its operating counterpart because accountants prepare financial disclosures consistent with laws and generally accepted accounting principles (GAAP). Those disclosures are reviewed by objective auditors. Managers determine the short-term reported earnings of their companies by: • Managing, providing leadership, and directing the use of resources in operations. • Selecting the timing of some nonoperating events, such as the sale of excess assets or the placement of gains or losses into a particular reporting period. • Choosing the accounting methods that are used to measure short-term earnings. Casual observers of the financial reporting process may assume that time, laws, regula- tion, and professional standards have restricted accounting practices to those that are moral, ethical, fair, and precise. But most managers and their accountants know otherwise—that managing short-term earnings can be part of a manager’s job. To understand the morals of short-term earnings management, we surveyed general managers and finance, control, and audit managers. The results are frightening. We found striking disagreements among managers in all groups. Furthermore, the lib- eral definitions revealed in many responses of what is moral or ethical should raise profound questions about the quality of financial information that is used for decision-making pur- poses by parties both inside and outside a company. It seems many managers are convinced that if a practice is not explicitly prohibited or is only a slight deviation from rules, it is an ethical practice regardless of who might be affected either by the practice or the information that flows from it. This means that anyone who uses information on short-term earnings is vulnerable to misinterpretation, manipulation, or deliberate deception. The Morals of Managing Earnings To find a “revealed” consensus concerning the morality of engaging in earnings-management activities, we prepared a questionnaire describing 13 earnings-management situations we had observed either directly or indirectly.