Page 236 - Encyclopedia of Business and Finance

eobf_E 7/5/06 3:00 PM Page 213

E

E-MAIL accounting standards (GAAP) while earnings manage-
ment does so within GAAP. (Technically, fraud requires
SEE Electromic Mail
scienter—proof of an intent to injure. It is a legal determi-
nation, and would be subject to an analysis of all sur-
rounding circumstances.)
EARNINGS
MANAGEMENT INTENSIFIED PRESSURES FOR
EARNINGS MANAGEMENT
Earnings management is the practice of inappropriately
managing the earnings number reported in the company’s In a landmark 1998 speech, the then chairman of the
income statement, and is quite different from the process SEC, Arthur Levitt, Jr., said:
of managing the company’s underlying business. The While the problem of earnings management is
Panel on Audit Effectiveness, established by the Public not new, it has swelled in a market that is unfor-
Oversight Board in response to a concern expressed by the giving of companies that miss their [earnings] esti-
Securities and Exchange Commission (SEC), found no mates. I recently read of one major U. S. company
single definition of the term, but cited several examples, that failed to meet its so-called “numbers” by one
including this from attorney Michael R. Young: penny and lost more than six percent of its stock
value in one day.… the different pressures and
There are two types of managed earnings. One expectations placed by, and on, various partici-
type is simply conducting the business of the pants in the financial community appear to be
enterprise in order to attain controlled, disci- almost self-perpetuating.
plined growth. The other type involves deliberate
manipulation of the accounting in order to create Also in that speech, the chairman suggested this slip-
the appearance of controlled, disciplined growth pery slope:
when, in fact, all that is happening is that
accounting entries are being manipulated [italics • Analysts ask managements of the companies they
in original]. (Panel on Audit Effectiveness, 2000) follow for guidance, as they project future earnings
for the company and projections are influential in
In an interesting overview article, Patricia Dechow
analysts’ recommendations.
and Douglas Skinner suggested that there is a fine distinc-
tion between fraudulent accounting and earnings manage- • Investors use those research reports in their deci-
ment: Both involve the intent, by reporting management, sions.
to distort their company’s earnings picture, but fraudulent • The management people running those companies
accounting does so by violating generally accepted try to meet the analysts’ earnings projections to (i)

213