Aggressive Earnings Management Case Study
Understanding Aggressive earnings management
This is a process in which a company firstly estimates their financial position, and then works backwards in order to achieve these desired figures
Aggressive earnings management refers to using accounting policies and stretching judgments of what is acceptable to present corporate performance in a more favorable light than the underlying reality.
Aggressive earnings management also refers to any accounting practice that is technically correct but deviates from how accounting policies were intended to be used. It capitalizes on the loopholes in general accounting principles in order to disguise financial performance.
There are many times when companies adopt aggressive accounting practices including selection of inappropriate accounting policies and / or unduly stretching judgements as to what is acceptable when forming accounting estimates.
These aggressive earnings management practices, while presenting the financial performance of companies, in favorable position, do not reflect the underlying reality.
Aggressive earnings management can occur in any entity, including the
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Window Dressing for an Initial Public Offering (or a Loan) – For companies entering phases where it is critical that reported earnings look good, accounting assumptions can be stretched—sometimes to the breaking point. Such phases include just before making a large loan application or just before the initial public offering (IPO) of stock. Many studies have demonstrated the tendency of managers to boost their reported earnings using accounting assumptions in the period before an IPO.
5. Litigation
The political cost hypothesis predicts when a firm subject to investigation may have the incentive to manage earnings to reduce the probability and amount of imposed wealth transfer (Alam and Makar, 1998). Cahan (1992) argues that firms will attempt to reduce the value of the wealth transfer by reducing its likelihood or size of the
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