A REVIEW OF MOTIVES AND TECHNIQUES AND THEIR CONSEQUENCES IN EARNINGS MANAGEMENT

Abstract

This study focuses on the concept of earnings management and its motives, techniques, and consequences. A review of literature shows that earnings management is an attempt by managers to alter financial reports either for their private benefits or for the benefit of stockholders. Companies have legitimate and illegitimate ways of engaging in earnings management. An approach is considered legitimate if it complies with Generally Accepted Accounting Principles (GAAP) and thoroughly discloses financial statements. By contrast, an approach is illegitimate if it violates GAAP. This study reviews literature on the incentives of managers and their techniques on earnings management. The types and extent of earnings management are dependent of several factors, such as personal incentives, stock market incentives, and regulatory motives. This study concludes that the consequence of earnings management is detrimental to firms when firm managers use earnings management opportunistically for their self-interests rather than for the benefit of stockholders. Earnings management is considered ethical and beneficial when managers exercise discretion over earnings within GAAP and in an attempt to safeguard shareholders’ interests. Moreover, earnings management is ethical and beneficial in communicating private information to stockholders and the public. Keywords: earnings management, motives, techniques, consequences