Memo on "Earnings Management" Abuse Article.
"The objectives of financial reporting are to provide information that is useful in investment and credit decisions, information that is useful in assessing cash flow prospects, and information about enterprise resources, claims to those resources, and changes in them" (Kieso 5). To meet these objectives, financial statements are ideally expected to present fairly, clearly, and completely the economic facts of the existence and operations of the enterprise. In reality, "wishful thinking may be winning the day over faithful representation" (Levitt). In other words, management is manipulating the numbers in order to meet the market expectation.
Article Summary .
In the society of market capitalism, corporations must play a major role in creating economic values to the society. As the article indicates, "markets exist through the grace of investors." If investors are making their investment decisions based on the false and fraudulent information provided by corporations, the ideal of free, fair and global market would be lost forever. The article argues that the following actions must be taken in order to prevent such a situation. First, the accounting framework must be improved to reduce ambiguity of accounting standards. Second, the outside auditing process and the audit committee process must be improved to ensure that audits are performed effectively, thoroughly, and correctly. Lastly, Corporate America needs a cultural change. Corporate managers must keep in mind that "the integrity of the numbers in the financial reporting system is directly related to the long-term interests of a corporation." .
The underlying problem that created serious accounting scandals in the United States is the culture of today's Corporate America, which give management too much incentive to manipulate accounting figures. Management, whose compensation is tied to the stock price, tends to give way to the temptation to allegedly make up the numbers or get involved with insider trading.