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A Problem In the Field of Finance Essay Example

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A Problem In the Field of Finance

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The study critically evaluates 100 S&P firms and their accounting practices and auditing trends between 1994 and 2003. The study identifies that in organizations where there is a strong presence of institutional investors, earnings management are minimal because there is control and care that is induced in the affairs of the firm. However, where there are many individual shareholders, earnings management is common.This study involved an examination of elements of managers’ manipulation of specific activities to avoid reporting losses and overstating profits. Evidence from the study shows that increases in sales, overproduction to report lower costs of goods sold and reduction in discretionary expenditures are used to attain the end of earnings management. The study was done through the use of cross-sectional analysis on activities in a sample of corporate entities. Minor factors that influence earnings management include the reduction of industry figures, modification of stock inventories and receivables.The writers of this article sought to use a logical approach to detect earnings management in financial statements where accrual accounting is utilized. To this end, they rely on the basic assumption that in accruals accounting, transactions entered in one period must be reversed in the next. Hence, the use of this technique can be employed to check transactions that are not reverse properly in subsequent periods. The empirical application of this study shows that it increases the probability of detecting earnings management by up to 40% of the normal possibility.The study sought to apply the principles and practices of detecting earnings management to a smaller economy that is classified as part of the developing world. The study shows that earnings management also occurs in the developing world and in smaller countries. However, there are no significant differences between the practice in small and larger firms as they seem to have similar approaches and traditions in carrying out earnings management. This is in contrast with companies in the developed world where the practice varies between smaller firms and larger firms.The journal article reviews whether earnings management leads to suboptimal investment decisions or not. The study includes the examination of fixed asset acquisition decisions in US public companies between 1978 and 2002. The study concludes that when earnings

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