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Discussion Topic: In a continuously competitive global business environment, publicly held companies face constant pressure to generate & report positive financial results. Unfortunately, some leaders may be tempted to report improper or misleading results in order to meet those expectations. See upload for more information and notes.
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Discussion Topic: Managing Earnings
In a continuously competitive global business environment, publicly held companies face
constant pressure to generate & report positive financial results. Unfortunately, some leaders
may be tempted to report improper or misleading results in order to meet those expectations.

Examine the critical information that a financial statement reader can learn from the contents of
the income statement, the balance sheet, and the statement of cash flows.

How might an integrated analysis of the statements help in assessing earning quality or detecting
earnings management?
Professor Notes
Youtube Video on Managing Earnings to broaden your understanding of our week discussion:



Please note that earnings management is a strategy used by management of a company to
purposely manipulate the company’s earnings so that the figures match a fore casted
target; this is used for the purpose of income smoothing. Companies try to keep the
figures as stable as possible without having to be categorized as good or bad earnings.
When reviewing the balance sheet, income statement, and cash-flow statement, there are
red flags to look for that could be indicators of possible trouble.
Note that Sarbanes-Oxley Act does address the concern of “managed earnings” when it
comes to accrual management with independent auditors who do not intimidated by the
manager but are allowed to let the managers know when something is off with their
financial statement. Also CFO’s and CEO’s are hold accountable for making sure that
their financial statements are presented correctly. On the other hand, with real earnings
management SOX does not minimize these concerns. The increase in criminal and civil
penalties to executives for practicing fraudulent accounting by filing false statements is
not the same as them practicing real earnings management which is not likely to result in
these penalties due to it being considered an internal operational process.

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