Earnings Management

Understanding earnings management has implications for one of the central questions confronted by practicing professional accountants and academic accountants. Although the variety of accrual options available under Generally Accepted Accounting Principles and the susceptibility of accruals to manipulation mean that the resulting accounting numbers could in principle be managed to the point of uninformativeness, available empirical evidence indicates that accruals do in fact have information content. The empirical evidence so far on whether earnings are managed is suggestive but not conclusive. Some research finds evidence that income-decreasing accruals occur more or less in the ordinary course of events when earnings are either extreme or above a contractually-specified target. Tests can therefore be constructed around the intervention in the regulatory force giving rise to earnings management. Even though they are not definitive, the empirical and analytical results accumulated so far can be used to facilitate systematic analysis of practical decisions.