What is earnings management and what is earnings management

Earnings management is the behavior of the management authority of the enterprise to maximize the self-interest of the entity by controlling or adjusting the accounting income information reported by the enterprise on the basis of following the accounting standards.

Earnings management is one of the hot issues in the accounting field recently, but there have been many different opinions on the concept of earnings management. William R. Scott, an American accountant, believes that earnings management is a concrete manifestation of the economic consequences of the choice of accounting policies. It refers to the act of choosing those accounting policies that maximize their utility or the market value of the enterprise, assuming that they can choose among a range of accounting policies.

Catherine Sheper, another American accountant, argues that earnings managers deliberately control the external financial reporting process in order to obtain certain personal interests on the basis of the usefulness of accounting data and information. Zou Xiao and Chen Xuejie (2002) believe that earnings management refers to the selection of the most favorable accounting policy or control accrual items under the framework of GAAP in order to maximize the value of the enterprise or to be pressured by relevant interest groups to achieve the expected profit, so that the reported earnings can reach the expected level.

I am inclined to believe that the surplus management is the process by which the management of the enterprise makes professional judgment and accounting choices in the structuring of business transactions and the preparation of financial and accounting reports, within the limits permitted by accounting policies, for its own benefit or in order to maximize the wealth of shareholders. Due to the certainty of the total amount of interests in a certain period, earnings management damages the interests of (small and medium) investors, creditors, stakeholders such as **, and users of accounting information.

Earnings management refers to the manipulative behavior of the management of an enterprise to achieve the desired level of book earnings through the use of accounting means or by taking practical actions in order to seek benefits for the company or individuals (Schipper, 1989). These behaviors include both legal and illegal manipulative behaviors, such as the intentional "excessive" or "improper" use of accounting choices and professional judgment to affect book earnings, and the intentional fabrication or fabrication of transactions to adjust book earnings. Earnings management in the narrow sense refers only to illegal or fraudulent earnings manipulation.

Generally speaking, the so-called earnings management is mainly earnings management in the narrow sense.

The new accounting standards stipulate that once the impairment loss of long-term assets such as fixed assets, construction in progress, intangible assets and long-term equity investments is recognized, they shall not be reversed in the accounting period after the conversion of the sailboat. This provision of the new accounting standards restricts the subjective arbitrariness of enterprise accountants in using the principle of prudence to make provisions for the impairment of various assets, changes the function of the "regulator" of asset impairment from two-way to one-way, and narrows the space for enterprises to abuse asset impairment to adjust profits.

The study of the basic characteristics of earnings management is helpful to grasp the content and framework of earnings management research. According to the previous discussion, the basic characteristics of earnings management include: From a sufficiently long period of time (the longest is the entire life cycle of the enterprise), earnings management does not increase or decrease the actual earnings of the enterprise, but it will change the reflection and distribution of the actual earnings of the enterprise in different accounting periods.

In other words, earnings management affects the accounting data, especially the reported earnings in accounting, rather than the actual earnings of the business. The selection of accounting methods, the application of accounting methods and changes in accounting estimates, the timing of the application of accounting methods, and the control of the time of transaction events are all typical earnings management methods.

2.Earnings management inevitably involves both economic returns and the signaling role of accounting data. There is no substantial difference between the economic gains referred to here and the actual profits of the enterprises mentioned in the preceding paragraph.

Although it is not known how much economic benefit a business has, earnings management is ultimately inseparable from the benchmark of economic return. Moreover, in the study of earnings management, people have begun to look for certain indicators such as cash flow and try to reflect economic returns in some sense and extent. It should be noted that both the practice of earnings management in enterprises and the theoretical research of earnings management are very concerned about the information content and signal role of accounting data.

The direction that earnings management aims at is the information content and signal function of accounting data. Regarding the status and importance of the "economic benefit view" and the "information view" of surplus management, different countries show different characteristics due to the large differences in the development and perfection of the market. In the earnings management of the developed market environment, people will consider the information content and signal role of accounting data more, and the important position of its "information view" will be more obvious; On the contrary, in the underdeveloped market environment, people are prone to stick to the deviation between the income of accounting reports and the income determined by economic returns or other laws and regulations, and the status of "economic return view" is correspondingly more prominent.

1) Laws and Regulations.

Recognition or non-recognition: Earnings management arises on the condition that accounting policies are optional. It enables enterprises to choose corresponding accounting policies and carry out accounting treatment according to their own compliance, which makes it possible for enterprises to adjust profits by legal means.

Profit manipulation is the use of illegal means to change the earnings information of enterprises, and its purpose is to deceive users of accounting information and obtain improper benefits.

2) Different means used: Since earnings management is premised on the selectivity of accounting policies, the application of means is carried out within the scope of accounting laws, regulations and standards. Profit manipulation is the illegal use of illegal means to whitewash the financial statements of enterprises.

For example, the early recognition of business receipts and the postponement of the recognition of current expenses, the use of the accounting treatment of sales returned to Kai New Year's sales in the year-end fake sales, long-term potential losses and accounting, etc. Some methods of profit manipulation become illegal manipulation when they break through certain limits.

3) Different motivations for behavior: both earnings management and profit manipulation will make the company's accounting statements.

Authenticity and reliability are compromised, but the motivations for the two are quite different. The purpose of earnings management is nothing more than to meet the requirements of maximizing shareholder wealth and reasonably avoiding taxes.

Their management performance and management skills are recognized. Profit manipulation, on the other hand, is the management of the enterprise by taking advantage of information asymmetry and using fraudulent means to illegally adjust the company's surplus, and the only person who realizes the improper profit is the manager of the enterprise, while the majority of shareholders and other users of information become victims.

Extended information: 1. Reasons for generating earnings management: accrual accounting.

The inherent defects are the main factors in the formation of earnings management. Accruals.

Accounting or accrual accounting attempts to record transactions and other events and circumstances that occur with an economic entity over different periods in accordance with the financial results they produce, rather than recognizing them when the economic entity actually receives or disburses cash. Therefore, in order to reflect the performance of an economic entity in a given period, rather than merely recording the receipts and expenditures of cash, accrual accounting uses the methods and procedures of withholding, amortization, deferral, and distribution, and matches the receipts and expenses, gains and losses of each period.

Earnings management is a concrete manifestation of the economic consequences of the choice of accounting policy.

Earnings management means that the management of the enterprise follows the accounting standards.

On the basis of the control or adjustment of the accounting income information reported by the enterprise, the behavior of maximizing the subject's own interests is achieved.

Earnings management is currently a foreign economics and accounting discipline.

Topics of extensive research. There are many divergent opinions in the accounting community on the concept of earnings management. From the following two authoritative definitions, it can be seen that the basic meaning of earnings management is pure picking.