The Similarities and Differences between Earnings Management and Fraud

Abstract

Objective: The main objective of this article is to indicate differences between earnings management and fraud.Research Design & Methods: The research methods applied are based on a critical analysis of the literature on the subject, both in Polish and English, a comparative analysis of legal acts and inductive reasoning.Findings: Earnings management involves intentional and lawful actions undertaken by an entity’s management, aimed at changing the figures it reports, particularly earnings, in order to present the desired picture of the entity’s financial standing and economic position, as well as its achievements in financial statements for the purpose of misleading financial statement users or obtaining benefits guaranteed in managerial contracts. This is achieved by applying accounting judgment and estimates, changing these estimates, choosing specific methods from among the acceptable accounting methods allowed by the applicable accounting regulations, structuring of economic transactions or undertaking actual activities.Implications / Recommendations: Earnings management should not be identified with fraud, as earnings are managed within the framework of legal regulations in the field of accounting and taking account of solutions adopted in the accounting policy of a given entity. However, any abuse in this field, whether it involves departing from or violating the accounting principles or standards, may lead to intentional misstatements in financial statements – that is, fraud in its broad sense.Contribution: Inspiring further development of research on earnings management from the viewpoint of determinants or tools applied.