Compose a 1500 words essay on Earnings Management: The Continuum from Legitimacy to Fraud. Needs to be plagiarism free!Earning management is a critical part of financial accounting because it provides
Compose a 1500 words essay on Earnings Management: The Continuum from Legitimacy to Fraud. Needs to be plagiarism free!
Earning management is a critical part of financial accounting because it provides information to the users of financial statements for interpreting and deriving conclusion about the performance of the company. Creative accounting practices are such malpractices in accounting which may be legal and in accordance with the existing standards but may not be in line with the true spirits of the rules laid down under accounting standards. In other words, when financial statements are prepared by the relevant managers of a company that is inconsistent with the purpose or intention of the existing accounting standards, then it is said to be a practice of creative accounting. The managers do so by taking advantage of the flexibilities available in the letter of the rules.It is not very easy to define earning management. Still, three elements can be regarded as key elements of earning management. They are:• Flexibility: Accounting is always associated with flexibilities present in it. While accounting one can use their discretion to choose their own preferred way of recording sales or turnover of the company, the method of depreciation to be used by the company, the method of valuation of inventory, etc. This type of flexibility helps the managers of a company to represent the true and fair view of the company’s affairs and its earnings in the financial statements. .• Account Management: Accounting policies can be utilized by the managers of a company to accomplish the objectives.