Essay On Applied Financial Accounting


Over the past few years, the number of corporate failures has been increased because of the company’s involvement in the unethical activities. Consequently, various measures have been taken by to prevent such failures, such as the Sarbanes-Oxley Act 2002 to hold the top executives much more closely accountable for the financial reporting of their firms. Despite such measures, unethical accounting practices are still taking place in the entities across the globe. The fraudulent financial reporting can take place when both accountants and the managers are involved in the earning management practice (Salaudeen, Ibikunle and Chima 2015). Hence, this paper aims to critically analyze the strategies of earning management from the ethical and financial point of view.

Earning Management And Its Strategies

Earnings management is referred as the manager’s choice of the accounting policies for achieving the specific objectives. It can be primarily classified as either related to accounting, involving manipulating the records of accounting through fraudulent or aggressive accounting principles’ application, or related to the operations, involving management’s choice relating to the timing of operating or investment activities, having an outcome that the earnings reported are highly influenced by such choices (El Diri 2017).
From the financial perspective, earnings management involves using the accounting techniques to create the financial reports, which presents a highly positive view of the entity’s business activities and the overall financial position. There are various financial accounting principles and rules that need an entity’s management to make the judgement by following the accounting principles (Persakis and Iatridis 2016). Further, from the ethical perspective, earnings management is an unethical act by the company’s managers. Such practices are considered as misleading to the users of accounting information, and over the period of time, lessen the accounting number’s credibility, resulting in damaging the accounting profession’s reputation. The earnings management that are solely undertaken to improve the personal goals is usually thought as unethical (Gras-Gil, Manzano and Fernández 2016).

Some Of The Common Strategies Used For The Earnings Management Are As Follows:


Earnings-Focused Decisions

Earnings-focused decisions are the decisions that are taken by the company’s management, which are completely focused on meeting the estimates of earnings. The simplest way for the earnings management is controlling the expenses of an entity. The entities look out the ways to cut down any optional expenses so as to meet their earnings estimates. For instance, temporarily suspending staff training, advertising, or R&D activities. Such activities may be suspended for a short-time, believing that the entity will perform in a better way in the coming years, and after which, the suspended activities can be started again (Rahmandad, Henderson and Repenning 2018).  

Altering Accounting Principles:

Sometimes, the company’s management chooses the rule of accounting, which best shows the implicit economic factors. The earnings management takes place when the management of an entity chooses the alternative of any accounting standard that may results in causing the earnings figure to meet their expectations. For instance, Enron used the mark-to-market accounting methods for valuing the assets at the fair market value on the balance sheets of an entity as well as to highlight the profits (Ofori 2016). 

Biased Accounting Judgements:

The accrual accounting practices gives the opportunities for the earning management. The management requires to exercise some judgement while applying the accrual accounting method. Earnings management take place when the team of management distorts the judgement and mends the policies so as to meet the expectations (Achleitner et al. 2014).
In any way, exercising earnings management is detrimental to the company’s financial condition and its overall reputation. In short-term, it may lure the management executives, but the consequences of such activities may result in corporate failure. 

Conclusion & Recommendation

Therefore, it can be concluded from the analysis that the earnings management involves deliberately using the techniques to manipulating the accounting figures to meet the personal or professional goals. There are various strategies used by the entities’ management to engage in the earnings management. It is an unethical practice that results in loss of the entity’s reputations, its market share, and may end-up in corporate failures, in extreme situation. Hence, it can be recommended to the company to follow the ethical code and have proper corporate governance at place; and it is recommended to the investors that they must perform the due diligence prior of investing in any of the company’s stock. The financial reports, along with the other reports of the company must be carefully assessed to identify any red flags and earnings management.  


Achleitner, A.K., Günther, N., Kaserer, C. and Siciliano, G., 2014. Real earnings management and accrual-based earnings management in family firms. European Accounting Review, 23(3), pp.431-461.
El Diri, M., 2017. Introduction to earnings management. Springer.
Gras-Gil, E., Manzano, M.P. and Fernández, J.H., 2016. Investigating the relationship between corporate social responsibility and earnings management: Evidence from Spain. BRQ Business Research Quarterly, 19(4), pp.289-299.
Ofori, E., 2016. Detecting corporate financial fraud using Modified Altman Z-score and Beneish M-score. The case of Enron Corp. Research Journal of Finance and Accounting, 7(4), pp.59-65.
Persakis, A. and Iatridis, G.E., 2016. Audit quality, investor protection and earnings management during the financial crisis of 2008: An international perspective. Journal of International Financial Markets, Institutions and Money, 41, pp.73-101.
Rahmandad, H., Henderson, R. and Repenning, N.P., 2018. Making the numbers?“Short termism” and the puzzle of only occasional disaster. Management Science, 64(3), pp.1328-1347.
Salaudeen, Y.M., Ibikunle, J. and Chima, E.I., 2015. Unethical accounting practice and financial reporting quality: Evidence from Nigeria. International Journal of Academic Research in Accounting, Finance and Management Sciences, 5(2), pp.143-150.
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