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Companies are aware that analysts focus on protability in evaluating nancial performance.
Companies are aware that analysts focus on profitability in evaluating financial performance. Managers
have historically utilized a number of methods to improve reported profitability that are cosmetic in
nature and do not affect "real" operating performance.These methods are subsumed under the general
heading of "earnings management." Justification for such actions typically includes the following
arguments:
1) Increasing stock price by managing earnings benefits stockholders;thus,no one is hurt by these actions.
2) Earnings management is a temporary fix; such actions will be curtailed once "real" profitabilityimproves, as managers expect.
Determine:
a. Identify the affected parties in any scheme to manage profits to prop up stock price.b. Do the ends (of earnings management) justify the means? Explain.c. To what extent are the objectives of managers different from those of stockholders?d. What governance structure can you envision that might inhibit earnings management?
