‘’Earnings management, in exchange listed companies, is not fraud but a case of caveat emptor for investors ‘’
This essay is intended to evaluate different views on a case whether the earnings management in exchange listed companies is consider as a fraud or caveat emptor for investors. One of the first mentions of earnings management has been given by Shipper where she described it as ‘’disclosure management, in the sense of purposeful intervention in the external financial reporting process, with the intent of obtaining some private gain.’’ (Shipper, 1989). In other words the managers are adjusting profits or losses on final accounts to mislead the stakeholders and to encourage them from investing. Earnings management become a problem for investors as it generates fake impression about companies success and misguide them into making wrong investment decisions which often leads to a making a loss. Another problem arises with incorrect financial reporting which is insincere for investors and resulting in making a capital market inefficient. But, is the earnings management a financial statement fraud?
The ‘’caveat emptor’’ is a Latin phrase which means ‘’let the buyer be aware’’ in other words ‘’sold as is’’ it is considered as a caution to buyers that they should be considering that the products they are buying may have some faults and may not meet the expectations. The hypothesis is that the purchaser should
