A Different Perspective of Earnings Management/UNE PERSPECTIVE DIFFERENTE DE LA GESTION DE REVENU

Article excerpt


Many maintain that earnings management is harmful. Arguing that this is untrue, the paper studies the benefits of earnings management to firms' various contracting parties and investors, as well as the benefits on social resource allocation. The results of this research have important implication for regulators and lawmakers.

Key words: earnings, management, fraud, value-adding

Résumé: Beaucoup de gens insistent sur le fait que la gestion de revenu est préjudiciable. Argumentant contre cette point de vue, cet essai étude les bénéfices de la gestion de revenu pour les collaborateurs divers de l'entreprise et les investisseurs, ainsi que les bénéfices sur la distribution des ressources sociales. Le résultat de cette recherche s'avère très signifiant pour les régulateurs et les législateurs.

Mots-Clés: revenu, gestion, fraude, valeur ajoutée


Earnings manipulation is management's action taken to bring reported earnings to a desired level. Earnings manipulation has three mutually exclusive forms: earnings management, earnings fraud, and creative accounting. When earnings manipulation is performed through exercising the discretion accorded by accounting standards and corporate laws, and/or structuring activities in such a way that expected firm value is not affected negatively, it is earnings management, otherwise it is earnings fraud. Creative accounting is the earnings manipulation that does not violate accounting standards or corporate laws because of the lack of relevant standards or laws, for example, when firms engage in business innovations. (Ning, 2005)

Motivated mainly by the fact that almost all academics - including those who realize that earnings management is not a fraud - condemn earnings management, this paper intends to refute the claim that earnings management is harmful, justify the wealth transfer due to earnings management, and study the value-adding functions of earnings management. The paper proceeds as follows. The next section illustrates the objections against earnings management in prior literature. Section three argues for earnings management from various perspectives, while section four recommends actions towards earnings management. The final section summarizes and explains the contributions.


The litigious climate in the U.S. is such that management teams tend to avoid any discussions even remotely linking the two concepts of earnings management and management fraud (Brown, 1999), while earnings manipulation is perceived by managers to be an acceptable practice (Elitzur & Yaari, 1995). In the literature there has occurred little research arguing for earnings management2. Instead, most academics adopt hostile attitudes towards earnings management. An explanation to this phenomenon is that earnings management is mistaken for either earnings fraud or creative accounting.

Earnings management is well-known for four accuses as follows. First, earnings management is a fraud. Second, earnings management leads to the representational unfaithfulness of financial statements. Third, earnings management implies deviousness and unethical actions (Brown, 1999) as it intends to fool or mislead users of earnings information. Fourth, earnings management has wealth redistributive effects among related parties, for example, making managers better off at the expense of shareholders.


Many maintain that earnings manipulation is a harmful activity (Ziv, 1998), yet this is only partially true. Of the three forms of earnings manipulation, earnings fraud is harmful, creative accounting might be harmful, but earnings management is not harmful. This section intends to argue for earnings management from the following five aspects: representational faithfulness is only a relative concept, earnings management is not fraudulent and does not misrepresent firm's economic position or value, the wealth transfers due to earnings management are justifiable, and earnings management can be value adding. …


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