Table of Contents

1(a) What is Earnings Management? 2

(b) How do companies manage earnings? 3

(c) What are the means of detecting earnings management? 6 * Aggregate accruals/ Discretionary accruals 6 * Specific accrual 7 * Earnings distribution 8

2(a) Why do companies fail? (Causes of company failures) 9 * The Main Causes Of Business/ Company Failures 9 * The Solutions 10

(b) Comment on 6 corporate failure models, discussing their relative advantages anddisadvantages 11

Quantitative models: * Beaver 11 * Altman 12 * Taffler and Tishaw Model based on Z sore 14 * ZETA and Performance Analysis Score by Altman and Taffler 14 * H Score 15

Quantitative Models: * Argenti Model- A Score 15

References......................................................................................................................................18

1(a) What is Earnings Management?

Earnings management, often referred to as creative accounting, is a pressing practice which is still getting more and more widespread nowadays. But to understand what earnings management is, it is important to realize what we mean when we refer to earnings. Sometimes called the “bottom line” or “net income”, earnings are referred to as the single most important item in financial statements. They are in fact the profits of a company. They indicate the extent to which a company has engaged in value-added activities. They are a signal that helps direct resource allocation in capital markets. Companies with poor earnings prospects will typically have lower share prices than those with good prospects. Remember that a company's ability to generate profit in the future plays a very important role in determining a stock's price. Hence, given the importance of earnings, it is not surprising that company management has a vital interest in how they