Earnings Management Definition

One of the objectives of financial reporting is to periodically summarize information about an enterprise's financial performance. Since earnings represent accounting's summary measure of a firm's performance so wide range of users like analysts, investors, creditors, and boards of directors, etc. consider earning the most important item in the financial reports as they depend on it in making their decisions , but because corporate accounting scandals in the end of the 1990s and the beginning of 21st century like Enron, WorldCom and Xerox and given the importance of earnings, it is not surprising that “earnings management has become one of the main issues documented by academics, regulators and the financial press in the last decade”.

Therefore,

3-2. Earnings Management Definitions

Earnings management has been defined in many different ways: One of the most commonly used definitions of earnings management is the one of Schipper (1989, P. 89), who defined it as “a purposeful intervention in the external financial reporting process, with the intent of obtaining some private gain".

EM is also defined as “an intentional structuring of reporting or production/investment decisions around the bottom line impact” (Ayres, 1994, 540).

Also, Levit (1998) defines earning management as a gray area where the accounting is being perverted; where managers are cutting corners; and, where earnings reports reflect the desires of management rather than the underlying financial performance of the

3-4.Earnings management and Fraud

(Koumanakos, et al., 2005; Guan, et al., 2006) define Earnings management as "the process of taking deliberate actions within the constraints of general accepted accounting principles (GAAP) so as to achieve a desired level of reported earnings " On the other hand, when these actions go beyond the boundaries of GAAP, EM may be considered as a type of fraud.

Also, Al-khabash and Al-Thuneibat (2009, p.64) classify them according to its legitimacy. EM can be legitimate and fraud as illegitimate.

In brief, It is important to understand that the main difference between these two terms is that one occurs within GAAP and the other violates GAAP and this is obvious through the comparison made by (Dechow and Skinner 2000, P.241) as they distinguish between choices that are considered fraudulent accounting practices (that clearly demonstrate intent to deceive) and those judgments and estimates that fall within GAAP as