The ethics associated with earnings management decisions

Ethics in Earning Management
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Ethics in Earnings Management The term ‘earnings management’ describes a type of financial management which seeks to manipulate finances in a manner which positively impacts the company image. The act leads to a breach in the integrity of the accounting process. Distortion of company documents may occur in the managerial chain or through the accounting department. The aim is to give the company an increased advantage when statistics are available for investors and other stakeholders to view. Clearly, the whole process damages the credibility of the financial statement and may be punishable under the corporate law of any country in the world. The crime could be an international crisis if the impact transcends national boundaries CITATION Vla14 l 1033 (Vladu & Cuzdriorean, 2014). Conversely, the deed aids in accomplishing the goals set out in tax planning and minimize operational budget. Further discussion on the morality of the situation proves that earning management is unethical and creates legal problems in the end.
Additionally, newly-hired accountants face a huge challenge struggling to obey the chain of command while respecting the rule of law. Senior accountants and other high ranking managers are familiar with earnings management. They push law-abiding accountants and other personnel to accept and practice unethical behavior; the whole alteration of documents improves the company imageCITATION Rah13 l 1033 (Rahman, Moniruzzman, & Sharif, 2013).

Earnings management could be deleterious to the company in future because the management loses track of the real financial status. In fact, excessive of success accounting fools both the stakeholders and the management after a certain time. The practice affects the national economy when major companies in one industry follow suit. Earnings management is among the causes of the collapse of real estate in the early 1990s in the country. Customers and international investors made large investments in the real estate after seeing the polished financial statements. The industry collapsed and created a temporary recession on the economy.
Earnings management improve the earning capacity on paper and are instrumental in the expansion of middle-level companies CITATION Xue16 l 1033 (Xue & Hong, 2016). Moreover, the modified statements aid in reducing excessive tax and obtaining incentives in terms of incentives. The share value of that specific company increases owing to the sudden fall in the cost of capital. Companies are inclined to pursue such a strategic move with the hope of stopping after the internal and external conditions. The problem arises when the company does it for longer than expected and increases the risk of being caught. Nevertheless, the basic ethics of accounting discourage any form of modification of statements because it decreases the reliability of accounting reports. A good example of how the procedure works is through sales manipulation. The company lowers internal expense when sales decline. The overall appearance is a decreased margin of loss since the company incurs lower liabilities as per the current situation. The accountants also lower the profit margins in an effort to lower the taxes incurred in a financial year.
According to Rahman, Moniruzzman, and Sharif (2013), there are several ways of preventing the probability of earnings management. Companies may opt to adopt international standards of accounting as a means of discouraging internally developed accounting strategies. Great examples of such standards are the International Accounting Standards (IAS) and International Financial Reporting Standards CITATION Rah13 l 1033 (Rahman, Moniruzzman, & Sharif, 2013). Another technique involves regular government audits on all companies. The utilization of external auditors with no interest or connection with management helps in checking for irregularities in finances. Regular and sudden audits of financial documents discourage unethical behavior in any company. Alternatively, the federal and state governments may offer better incentives and tax breaks as a means of improving the legal and political environment for companies CITATION Xie03 l 1033 (Xie, Davidson, & Dadalt, 2003). The friendly environment enables transparency among companies. In fact, harsh government policies encourage illegal corporate activities as businesses struggle to survive in a hostile economy.
The concept of earnings management may not be illegal but shows signs of accounting manipulation. Moreover, the management engages in the practice with hopes of improving the image or lowering the annual tax. Continued practice affects the credibility of the company and develops into a legal issue over time. The use of international standards, government incentives, and regular auditing prevents the use of scrupulous techniques. Senior management is more likely to encourage the strategy as opposed to junior members or new employees. Some of the participants get involved out of fear for the chain of command. As a matter of fact, companies employ such moves when the environment for their development becomes obstructed with legal issues of challenges with public image. The long-term practice of such a management strategy could affect a whole industry; the economy collapses as a result. Nevertheless, the tactic helps in promoting external investment and expanding the company. Some companies may end up using it at certain points of their life cycle depending on the ingenuity of the management team. Despite this, earnings management is highly injurious most of the time because of the potential legal repercussions and effects on the economy.

References
BIBLIOGRAPHY l 1033 Rahman, M., Moniruzzman, M., & Sharif, J. (2013). Techniques, Motives, and Controls of Earnings Management. International Journal of Information Technology and Business Management, 22-34.
Vladu, A. B., & Cuzdriorean, D. D. (2014). Detecting Earnings Management: Insights from the Last Decade Leading Journals Published Research. Procedia Economics and Finance Volume 15, 695-703.
Xie, B., Davidson, W. N., & Dadalt, P. J. (2003). Earnings Management and Corporate Governance: The Role of the Board and the Audit Committee. Journal of Corporate Finance, 295-316.
Xue, S., & Hong, Y. (2016). Earnings Management, Corporate Governance, and Expense Stickiness. China Journal of Accounting Research, 41-58.