Earnings Management: The Role Of Accounting Professionals

Abstract

In today’s financial markets there is a great deal of pressure for corporations to meet investors’ earnings expectations. Failure to do so may result in the loss of millions of dollars in stock capitalization. As a result, an increasing number of corporate executives have succumbed to the temptation to “manage” their earnings in order to achieve targeted profits. The number of companies under investigation by the Securities and Exchange Commission (SEC) for possible accounting fraud related to earnings management has increased significantly in recent years. This article identifies and discusses four common areas of potential financial reporting abuse: restructuring costs, miscellaneous reserve accounts, materiality, and manipulation of revenue recognition. In addition, this paper discusses the vital role of accounting professionals as gatekeepers responsible for helping to maintain the viability of our financial markets.