...will talk about the fundamental of the earnings management, it including the concept and the feature of the earning management as well as the effect of the earnings management. Contents Abstract………………………………………………………………………………..2 Concept of earnings management……………………………………………………..4 Feature of earnings management……………………………………………………...5 Patterns of earnings management……………………………………………………..6 Evidence of earnings management for bonus purpose…………………….................7 Other motivations for earnings management……………………………………........8 The good and bad side of earnings management……………………………..............9 Conclusions…………………………………………………………..........................10 Reference………………………………......................................................................12 1. Concept of earnings management Since the 80s of 20th century, earnings management became a hot research subject in the international economics and accounting educational circles, the financial reporting and a contracting perspective can be viewed related to this hot subject. An accurate understanding of earnings management is very important to accountants, because it related to the understanding the usefulness of net income which will be reported to the investors. American accounting scholars Scott believe that “earnings management is the choice by a manager of accounting policies so as to achieve specific objectives”. Based on the different discussion, a definition of literature described from Healy and Wahlen...
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...adverse consequences to the financial market. This essay analyses both, causes and motives of earnings management as well as possible remedies. Therefore, it is not surprising that market participants, legislators, regulators, and academics are concerned with the need to control financial reporting abuses. The following paper will demonstrate how the effect to the good side and the bad side of it and outline the reason for the impact to appreciate the good and the bad of earnings management. Identify what is key driver of motivation either an earning management is good or bad. This will enable us to analyse the good and bad side nature of the earning management. BODY Good Side of Earning Management There is definitely a good side of earning management if it is properly practice for the benefits of the companies prior to achieving the key performance objective of the companies. Good earnings management means ―reasonable and proper practices. ―Accounting Subjectivity and Earnings Management: A Preparer Perspective‖ referred by Parfet (2000) contends: calls attention to ―the context in which decisions are made, where subtle effects from human perceptions and peer pressures, the complexity of combined factors, and a high-stakes business environment all impact good people who are trying to do their jobs with integrity. Good side of earnings management describe in the arguments shown as below point (1) and (2).It briefly describe, from...
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...International Business & Economics Research Journal Volume 3, Number 3 Effects of Exchange Rates On International Transfer Pricing Decisions Canri Chan (E-mail: canri.chan@miis.edu), Monterey Institute of International Studies Steven P. Landry (E-mail: steve.landry@miis.edu), Monterey Institute of International Studies Terrance Jalbert (E-mail: jalbert@hawaii.edu), University of Hawaii at Hilo Abstract Events leading to the passing of the Sarbanes-Oxley Act have led to increased concern with and scrutiny of potential management manipulation of financial statements. From an agency theory perspective, managers have incentives to manipulate organizational methods and choices in order to produce financial statements that those managers believe will maximize their incentive compensation. Transfer pricing represents one possible choice that managers can manipulate. This paper investigates whether exchange rates affect transfer pricing particularly as it relates to maximizing overall corporate profitability. The effects of taxes and government regulations have been explored in considerable depth in the transfer pricing literature. However, while transfer prices should also be affected by exchange rates in predictable ways, this variable has received comparably little attention in the literature. Inclusion of exchange rates in an analysis of transfer pricing and corporate profitability presents an opportunity to add to the literature. We conducted an experiment to examine how...
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...The Managerial Compensation Responding to Earnings Manipulation Ruoyu Zhang** August 10, 2012 Abstract When the true earning in each period is private information to the agent, then the performance based pay provides the agent with incentive to misallocate the earnings to get more compensation. To address the concern of earnings manipulation problem, SEC imposed a strict disclosure regulation in 1993. An optimal managerial contract should be designed not only to provide the agent with an incentive to take actions that enhance the actual profitability of the firm, but also to minimize the agent’s incentive to falsify earnings reports. This paper uses a two-period model to demonstrate that the compensation scheme contingent on reported earnings cannot provide the agent with the incentive both to maximize earnings and to report earnings honestly. In the optimal contract, the principal must still tolerate some degree of earnings management. In addition, with the increase of the misrepresentation penalty, the principal would rather lower the incentive to make the agent work less but report earnings truthfully. I thank Professor Jean-Etienne De Bettignies and Professor Olena Ivus for valuable comments and suggestions. All errors are my own. ** MSc Candidate in Business Economics, Queen’s School of Business. Email: 11rz3@queensu.ca Table of Contents Abstract ..........................................................................................................
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...Lesson Preparation Project Chapter 11: Earnings Management 11.1 Overview “Earnings management is the choice by a manger of accounting policies so as to achieve some specific objective” There are two ways to think about earnings management: as an opportunistic behaviour by managers to maximize their utility and from an efficient contracting perspective. Issues arise in regards to earnings management due to the choice of accounting policies, discretionary accruals, and finally the line where management becomes mismanagement. 11.2 Evidence of Earnings Management for Bonus Purposes In 1985 earnings management was researched to see if managers would manage net income so as to maximize their bonuses under their firm’s compensation plans. Healy examined firms whose compensation plans are based on current reported net income only, this is also known as bonus schemes. With a typical bonus scheme, reported net income will have a lower bound called bogey and upper bound called cap. A manager’s bonus will increase as reported net income increases, unless there is a cap at which point the bonus will remain the same as net income continues to increase beyond the cap. A manager will not receive any bonus when income is below the bogey. Healy predicted that when net income is between the bogey and cap is the manager motivated to adopt accounting policies to increase reported net income. Net income that is below the bogey or above the cap would motivate managers to “take...
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...supervision, some time after implementing the individual incentive scheme. Also, her training and knowledge as a bachelor of Commerce graduate proves her capability to effectively supervise the company. II. Analysis of Present Situation Company Analysis Gintong Hiyas is a company that sells handmade gold and other jewelry. The business, which started in Quezon City in 1986, is owned and operated by the Santos family. With the establishment of new shopping malls, four new outlets were opened in different parts of Metro Manila with each member of the family directly managing and overseeing the day-to-day operations of the store assigned to them. The said expansion, however, created difficulties in managing the five outlets so the Santos family decided to close the original store and to defer the opening of new sale outlets. Elizabeth Santos is one of the managers of Gintong Hiyas. Being a graduate of Commerce in 1992, she was assigned to design store management systems and procedures for all the stores. Among her contributions were a system for stock inventory taking and reconciliation at the end of each working day and a better bookkeeping and accounting system. In effect, she has increased the sales of her assigned branch. In 1995, her father transferred the responsibility of supervising another store because his father wanted to focus on the production side of the business. Elizabeth implemented a bonus incentive scheme to motivate her staff and to increase their sales as well...
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...Kapitel 1 Normative (prescriptive) accounting theory Inte baserad på empiriska tester (som positive teorier är) utan de är baserade på vad researcher tror ska eller borde inträffa vid särskilda omständigheter. Teorier som föreskriver (prescribe) istället för förklarar (describe) särskilda handlingar kallas för normativa teorier eftersom att dom baseras på normer som researchern som lägger fram teorierna har. T.ex. säger hur vi ska ta till oss och använda redovisningsmetoder. Kapitel 2 Theories of regulation Public interest theory There is the public interest theory of regulation which propose that regulation be introduces to protect the public. It assumes that the regulatory body (usually government) is a neutral arbiter of the public interest and does not let its own self-interest impact on its rule-making processes. “The regulator does its best to regulate so as to maximize social welfare. Consequently, regulation is thought of as a trade-off between the costs of regulation and its social benefits in the form of improved operations of markets”. Regulation put in place to benefit society as a whole rather than vested interests. Regulatory body considered to represent interests of the society in which it operates, rather than private interests of the regulators. Assumes that government is a neutral arbiter. Criticisms of public interest theory Critics question assumptions that economic markets operate inefficiently if unregulated. Question the assumption...
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...discovered that the closer the co-operation between finance departments and human resources (HR) departments on areas like bonus schemes, the better the organisational performance will be. The research was carried out by John Innes, University of Dundee; Reza Kouhy, Glasgow Caledonian University; Rishma Vedd, California State University, Northridge; and Takeo Yoshikawa, Yokohama National University on a CIMA grant. The project examines the relationship between HR management, management accounting and organisational performance. Six case studies covering the UK, Canada and Japan were analysed with the results tested in a series of 100 telephone interviews. Top level findings show that HR and finance teams need to work closely with one-another on HR policies to ensure better performance across the entire business. Where the tone is set at the top, with HR Directors and Finance Directors being seen to liaise on bonus schemes and benchmarking exercises, it is generally felt that a better working relationship between HR and finance can be achieved. Researcher John Innes, explains further: 'It was commonly considered that while HR can benefit from getting financial input on how to structure bonus schemes and strategies, that finance can equally benefit from working with HR to understand how viewing employees as 'assets' rather than 'costs' can lead to a net positive effect on an organisation's long-term performance.' Although the relationship between HR and the operational and executive...
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...all the workers is 80 and there is no difference between manufacturing 100 and 80, he will definitely make only 80.This is called systematic soldiering (Taylor,1998).To solve the problems,driving forces are needed to find to boost the motivations to exert their full efficiency.According to Maslow’s hierarchy of needs, people are driven according to their needs physiological need, safety need, love (belongings) need, esteem need, and self-actualization needs) to be motivated and to get job satisfaction (Maslow, 1943).Even though the needs of the people are different to each other, the basic remuneration always play a major incentive to generate performance (Smith, 1776;Marx, 1867). So companies create an attractive pay bonus scheme based on the performance (accounting numbers) like based on the certain amount of sales, (sometimes called payment by results) to enhance...
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...is a technique taken by manager in manipulating accounting transaction in order to achieve some specific objective. This is more likely to occur in few circumstances either the company unable to meet the investor expectation or sometimes also due to several motivation factors. Even though earnings management is often intentionally to misleading information, however it is consider as “allowable but unethical” as long as not lead to fraudulent activity. This concept is said to be unethical because it still against the objectivity and the originality of that standards even complying all the basic requirements. In this writing provide some discussion of literature review of the CEO changes and earnings management. Generally, according to big bath hypothesis, the CEO is trying to hide current higher earnings in order to secure their position in future drop earnings performance. In other hand, the contemporary CEO claim that he always does not have sufficient time especially on his first year tenure to show his capability, hence take opportunistically behavior by manipulate the account in achieving their target. Also, in few cases, CEO’s compensation also being some motivation factors. CEO big bath hypothesis Generally, the likelihood involuntary CEO turnover are positively related to a firm's earnings management. The relation surrounding CEO turnover also occurs either the current performance good or bad. Big Bath in accounting is a technique take by CEO in taken against income...
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...Quality Metal Service Center Group 2 Araojo, Oscar Jan Asis, Alvin Magboo, Mike Raniel Manzano, Krystele Ann Peralta, Diana Marie Rodriguez, Jerelleen EXECUTIVE SUMMARY Quality Metal Service Center has shown its resilience in the industry through its century old existence banking on industry knowledge and high quality products. The company is doing well and would like to maximize its potentials by looking into its control system. Analysis has shown that potentially profitable projects may not be pushed through due to some inefficiencies in their performance evaluation and incentives system. The company is currently using ROA as the sole criterion of evaluation. However, ROA will be lower on companies with newer assets that those with older ones. This will lead managers to reject proposals of new projects with large capital outlay. The Economic Value Added is a more appropriate measure in this situation. In light of the application of the EVA, the issue with the Columbus District manager will be resolved, and the proposed project should be accepted. INDUSTRY ANALYSIS The Metal Distribution Industry is highly competitive and fragmented industry which composed of fewer companies because of the high costs of establishing and maintaining this kind of business. It is on its mature stage that improved efficiency on production is the priority in order to beat the competitors in the industry. End users still have different needs which are unmet by the market players...
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...136 Positive Accounting Theory and Science JCC Journal of CENTRUM Cathedra ™ Positive Accounting Theory and Science by M. Humayun Kabir Senior Lecturer, Faculty of Business Auckland University of Technology, Auckland, New Zealand Abstract This paper examines the development of positive accounting theory (PAT) and compares it with three standard accounts of science: Popper (1959), Kuhn (1996), and Lakatos (1970). PAT has been one of the most influential accounting research programs during the last four decades. One important reason which Watts & Zimmerman (1986) have used to popularize and legitimize their approach is that their view of accounting theory is the same as that used in science. Thus, it is important to examine how far accounting has been successful in imitating natural science and how the development of PAT compares with the three standard accounts of science. This paper shows that accounting could not emulate the success of natural science. Further, the methodological positions of PAT conform to none of the standard accounts of science. Rather, PAT contains elements of all three. Finally, this paper identifies some methodological gaps in PAT. Keywords: Positive Accounting Theory, Philosophy of Science, Methodological Controversies Acknowledgements I would like to thank two anonymous reviewers of the journal for their helpful comments. Earlier versions of this paper benefited from comments from Lee Parker of the University of South Australia, Keith...
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...1] Contract labor system * A workman is deemed to be employed as Contract Labor when he is hired in connection with the work of an establishment by or through a contractor. Contract workmen are indirect employees; persons who are hired, supervised and remunerated by a contractor who, in turn, is compensated by the establishment. * 3. Contract labor should not be employed where (a) The work is perennial and must go on from day to day;(b) The work is incidental to and necessary for the work of the factory;(c) The work is sufficient to employ considerable number of whole time workmen; and (d) The work is being done in most concerns through regular workmen. * 4. The Contract Labor (Regulation and Abolition) Act, 1970 Act and the Contract Labour (Regulation and Abolition) Central Rules, 1971 came into force on 10.2.71 * 5. Main objective of the Contract Labour (Regulation & Abolition) Act, 1970 is two fold:-i) To regulate the employment of Contract Labour in certain establishments; andii) To provide for its abolition in certain circumstances. In order to achieve above objectives, the Act lays down various requirements with regard to hiring of Contract Labour, its wages & earnings, working conditions etc. * Every Every industry engaging 20 or more workers on contract basis.6. contractor engaging 20 or more workers. * Contract is awarded by the concerned department /commercial7. Concerned deptt. send a job request to the purchase deptt.department...
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...Topic 1 The Scope of Economic Analysis Question 1.1 “According to the definition of opportunity cost, the more alternatives that we have given up in undertaking an action, the higher the opportunity cost.” Please comment on this statement and explain your answers using examples. Ans Opportunity cost of an action refers to the value of the best alternative that must be given up in order to undertake that action. That is, the highest-valued option forgone. The statement in the question is uncertain and is determined by situation, because the opportunity cost is the value of the best alternative forgone rather than the sum of all the alternatives forgone. There are two possibilities. Firstly, if the value of one added option is higher than that of original best alternative forgone, the opportunity cost increase. By contrast, if each of the added options’ values is no more than that of original best alternative forgone, the opportunity cost remains constant. Example for the situation that the value of one added option is higher than that of original best alternative forgone: Suppose that you have $5,000 dollars at hand and you are considering spending this money on (Listed in the priority of the action’s value for you) |Original buying list |Value |Added alternatives |value | |1. Buy a notebook |10 |1. Buy a mobile phone |9 | ...
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... Of course, M&S published comparative figures for the IFRS based results for the latest year and they restated the previous year as they should. However, I seem to be the only person who is worried or concerned or bothered in the slightest about the potential for smoke and mirrors lying behind some or all of what was revealed. Why am I worried? Well, M&S is still trying to work its way out of a fairly tough trading period and coming at the end of the transition to IFRS I wanted to hear what analysts thought about what I was worried about. This is the second edition of this article and the final section brings us right up to date by discussing the M&S executive bonus scheme that helps to explain why there has been no explanation by M&S over the introduction of International Financial Reporting Standards based accounting results. Finally, I include a question from the AGM that reflects some of the concerns I raise here: I also include the official M&S answer. Background In 1999 the stock market...
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