When Managing Earnings Becomes Illegal Essay

1200 Words Apr 12th, 2011 5 Pages
| When Managing Earnings Becomes Illegal | | | Jeneen Davis | 2/27/2011 | |

MSAF 670/Spring 2011
University of Maryland University College
Professor John Halstead

Introduction The concept of earnings management is not a new thing. Its practice is actually very common among most companies. Managing earnings is not all necessarily bad. However, there is a fine line that shouldn’t be crossed. Corporate managers are under extreme pressures when it comes to meeting forecasted results. There are various factors that contribute to these pressures: external, company culture, and personal. Corporate management may use various transactions to help “make the numbers”. But, it is when the line between practical methods
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So how does this all come about? Various pressures contribute to a management team managing its earnings. They can come from outside the company, from within, or can even be personally motivated. According to Bochner and Clark (2008), these factors are powerful incentives to meet financial targets. James Duncan (2001) wrote an article describing the many pressures put upon corporate management titled “Twenty Pressures to Manage Earnings”. In his article he identified several external forces, company-specific factors, and personal factors that have had some impact on just about every company there is. In my opinion, the number one outside pressure companies face is meeting analysts’ forecasts. Analysts are unforgiving if a forecasted estimate is missed. They are very instrumental in how the market reacts to earnings announcements and can control whether the stock price will rise or fall. They like to see continual upward growth. Company managers try to meet or beat Wall Street projections all the while ignoring using sensible business practices to represent the company faithfully (Levitt, 1998). Other external factors include: debt markets and contractual obligations. Some companies depend on outside financing to fund their growth and also to maximize their returns to stakeholders. If at any point the company seems to be in distress, it can hurt their

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