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Meanings, Motivations and Techniques of Earnings Management Yihui Jiang Advances in Social Science, Education and Humanities Research, Volume 496 Proceedings of the 2020 3rd International Conference on Humanities Education and Social Sciences (ICHESS 2020) Meanings, Motivations and Techniques of Earnings Management Yihui Jiang Dongbei University of Finance and Economics, 116025, China [email protected] ABSTRACT Earnings management has been a crucial enterprise behavior that would influence the figures on financial statements and the decision of report users. Because of transactions in capital market, some contract items and relevant government laws, managers are motivated to manipulate earnings. By manipulating accruals and real transaction activities and some methods, such as taking big bath and cookie jar reserves, the accountings figures reported on financial statements can be managed and changed. Besides, different kinds of firms may take different methods to manipulate earnings, but there are several ways that are very common that stakeholders should take into consideration. Keywords: Earnings Management, Motivations, Techniques firms may have different techniques to manipulate reported profits, several commonly used techniques should attract 1. Introduction stakeholders’ attention when analyzing financial statements. It is widely believed that companies, especially companies that are listed and are going to be listed engage in earnings 2. Definition of Earnings Management management very often, taking actions to change the data reported on financial statements. While there are plenty of There are many researches concerning earnings theoretical researches trying to document what earnings management interiorly and abroad, but scholars have not management exactly is, there has been no agreement about reached an agreement on the definition of earnings the explicit definition of earnings management. Some management. However, many scholars have made different scholars think earnings management is in accordance with theoretical explanations of earnings management at accounting principles, standard and the laws, while others different aspects and in different degrees. hold the view that the manipulation of earnings is to realize Scott (1997) described in his famous book Financial private interests rather than maximize the firm’s value and Accounting Theory that "earnings management is the they think the manipulation is aggressive or fraudulent for behavior of managers to maximize their own utility or the accounting standard. As Healy and Wahlen’s research in company value through the choice of Accounting policies 1999 regarding earnings management is typical and within the permissible scope of GAAP (Generally Accepted representative, this paper takes their points as the base to Accounting Principle). This definition puts forward the summarize the literatures concerning motivations for purpose of earnings management from the perspective of earnings management. There are in total three incentives managers and companies, namely, self-utility maximization according to Healy and Wahlen (1999), which are to meet and corporate benefits maximization. It also involves the capital markets expectations, to meet contract items that are relationship between GAAP and earnings management and related to accounting figures and to meet government laws points out that earnings management does not violate GAAP. and regulations. This paper does literature review about Healy and Wahlen (1999) thinks: “earnings management taxation regulation briefly, which Healy and Wahlen (1999) occurs when managers use judgement in financial reporting did not, because the author thinks taxation is so important and in structuring transactions to alter financial reports to that for most of regions when there are earnings, there is either mislead some stakeholders about the underlying taxation, and although regulations would be variable in economic performance of the company, or to influence the different areas, the main content and purposes would not contractual outcomes that depend on reported accounting differ significantly. This paper also summaries some numbers.” The definition proposes two approaches to literatures about techniques of earnings management. The earnings management and argues that the purpose of difference between reported earnings and cash flows is management to manage earnings is to mislead reporting accruals, so manipulating accruals is a way of earnings users and thus influence their decisions. Schipper (1989), management. Besides, manage real transaction activities is moreover, argues that earnings management is the one of the techniques as well. What is more, there are also enterprise management personnel purposefully controlling some common techniques, such as taking big bath and external financial reports disclosure management in order to cookie jar reserves. In addition, although different types of obtain some private interests (not neutrally processing Copyright © 2020 The Authors. Published by Atlantis Press SARL. This is an open access article distributed under the CC BY-NC 4.0 license -http://creativecommons.org/licenses/by-nc/4.0/. 141 Advances in Social Science, Education and Humanities Research, Volume 496 business activities). This definition to be extended slightly, 3. Motivations for Earnings Management "real" surplus management can be completed by choosing the exact time to invest or by other financial decision and Concerning the motivations of earnings management, many then to change reported earnings. Lu (1999) believes that different scholars have conducted relevant studies. Healy earnings management is an accounting choice made by and Wahlen (1999) summarized the motivations for enterprise managers to maximize their own utility or earnings management arise from: (i) capital market maximize enterprise value within the scope allowed by expectations and valuation; (ii)contracts that are written in accounting standards. Ning (2004) indicates that earnings terms of accounting numbers; and (iii) anti-trust or other management refers to the management conducts earnings government regulation. Most of the studies can be classified manipulation within the scope permitted by accounting as one of the three points, so this paper reviews some standards and company law or achieves the purpose of literatures based on these points about earnings earnings manipulation through restructuring business management reasons. activities or transactions. Wei (2000) states that earnings management is a process in which enterprise management makes judgment and accounting choices when compiling 3.1. Capital Market Expectations and Valuation financial reports and structuring transaction items in order to mislead other accounting information users' The first is about the motivation of Capital Market. understanding of the business performance of enterprises or According to Healy and Wahlen (1999), motivations related influence the results of contracts based on accounting data. to capital market transactions can be divided into two Based on the above definitions of earnings management, categories: capital market transactions and meeting scholars' understanding, and interpretation of earnings expectations of financial analysts, some investors and other management can be roughly divided into the following shareholders. points: First, different scholars make different definitions of the degree of earnings management. Scott (1997), Lu (1999) and Ning (2004), et al. believe that earnings management is 3.1.1. Capital Market Transactions not in conflict with GAAP or other accounting standards and laws and belongs to the normal management behavior According to Dye (1988), one reason for mangers to of enterprises. But Healy and Wahlen (1999), Wei (2000), manipulate earnings is that investors and financial analysts et al. hold the point that earnings management is a way to would use accounting figures to do valuation of stocks. mislead stakeholders, which is aggressive and fraudulent Besides, one reason for income smoothing is that managers when it comes to accounting standards and relative laws. believe that most investors would rather invest more in Second, different scholars think the purposes of earnings companies with smoother income stream (Ronen & Sadan, management are different. Schipper (1989) et al. believe 1981). Income smoothing is a technique for earnings that the management of surplus is for the realization of management. Many researchers find that management private interests. However, Scott (1997) and Lu (1999) et al. buyouts would lead to some earnings managements, and the indicate that their purpose is not only to maximize manager of buyout firms tends to show lower earnings individual interests, but also to maximize the interests of before buyouts. DeAngelo (1988) points out that the enterprises, or either. Third, different scholars argue that earnings figures are critical for the valuations in methods used to achieve earnings management are different. management buyouts and she assumes that the manager of Scott(1997) believes that earnings management can be buyout firms has a motivation to “understate” earnings. achieved by choosing different accounting policies, while Also, controlling unexpected accruals belongs to earnings Schipper(1989), Healy and Wahlen (1999) and Wei (2000) management as well. The research carried by Perry and state that earnings management can be achieved directly by Williams (1994) report that some companies control controlling and changing the financial statements available unexpected
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