Compare and contrast Accrual Earnings Management Free Essay Example

This fact always shows unusually more production costs (overproduction method and sales level method) and less discretionary expenses. Needs to find more information in paper. 1. Institutional ownership negatively relate to real earnings management. 2. Growth opportunities positively relate to real earnings management. 3. Real activities manipulation among firms trying to avoid negative annual forecast errors. (page 365) Accrual Earnings Management: a. Managers are unwilling to only depend on accrual manipulation. . Managers are able to manage earnings at year-end up to or down to the amount that is needed.

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C. Accrual manipulation is more likely to draw scrutiny from auditors and regulators, such as the SEC. D. Accrual manipulation is risky, as the amount by which earnings needs to be adjusted may exceed the amount it is possible to manipulate accruals. E. Accrual-based earnings management is achieved by changing the accounting ethos or estimates used when presenting a given transaction in the financial statements.

For example, changing the depreciation method for fixed assets and the estimate for provision for doubtful accounts can bias reported earnings in a particular direction without changing the underlying transactions.

F. Accruals can be used at the end of the year to adjust for any changes necessary that were accomplished through the use of real earnings management. Managers can engage in both real earnings management and accrual earnings management at the same time, this causes negative relationship between abnormal accruals and abnormal SCOFF.

Managers’ goal about report higher earnings may cause negative correlations between abnormal production costs and abnormal discretionary expenses.

(Real earnings management, page 348) Both of Accrual Earnings Management and Real Earnings management are methods about allocation of capital. Investors and stakeholders usually rely on firms’ financial managers intent on using earnings management to convince investors and stakeholders to believe that firms successfully achieve their target. However, this may causes a risk of inefficiency in allocation of market capital.

Accrual earnings management focuses on using accounting estimates to meet firms’ goals. However, if those estimates do not match with facts, firms’ financial statements will be deceive and mislead investors and stakeholders… Firms who use real earnings management try to mislead at least some of their investors to believe that they have achieved goals successfully by taking real activities like overproduction, sales manipulation, and discretionary expenditure reduction. However, real earning management is normally not a value added activity because it may has negative impact on firms’ future cash flow.