Earnings management Avoid Earnings Decreases and Losses

Question: Discuss about the Earnings management to avoid earnings decreases and losses? Answer: The paper provides a cross-segment distribution of earnings evident in firms with low occurrences of small reduces and high occurrences of small raises. The motivation for the study emphasizes to avoid earning decreases and losses on earnings management. The evidence is highlighted on two works of earnings namely cash flow operations and working capital. However, the issue that Dichev and Burstahler (1997) are trying to discuss enterprise's performance based on measures of earnings by matching the revenues to expenses at the time when the transaction is carried out and when the payment is made in the discussion section of the annual report. However, the importance of strategic actions is measured against the goal of the firm to bring out high increases in earnings over a long-term when the earnings per share are below an encompassing number. The importance of earnings on cash flow and working capital is still prevalent in today's time to review the financial condition of the firm wit h increased earnings (Hamdi and Zarai 2102). The study elaborates the role of managers as well in maintaining a pattern of increasing earnings to achieve the important objective of the firm. The theoretical arguments that the authors provided in establishing hypotheses were based on the cross sectional distribution of earning changes such that the management wishes to evade losses will be reflected in the form of low occurrences and high occurrences of small losses and positive earnings respectively. The author states two types of evidence in formulating the hypotheses to determine the avoid decreases in earnings and losses (Li 2014). The methods applied to study the earnings management is done through a graphical representation in the figure of histograms of the cross-segment pooled experimental distributions of magnitude changes and level of earnings. The other part is based on carrying out statistical tests that of the formulated hypothesis using ex-ante and ex-post manipulation of earnings. Nevertheless, the changes in cash flow operations are recorded using quartiles for 1000 observations of the conditional distributions for the portfolio formed on the magnitude of scaled earnings whereas the changes in working capital is also shown in quartiles for 1000 observations on the scaled earnings. The results show that the earnings decreases and losses are evenly controlled to manage away. The empirical evidence depicts that 8-12% of the firms that shows little-uncontrolled earnings decrease the exercise to discretion on reported increased earnings. On the other hand, 30-44% firms with uncontrolled negative earnings decrease the exercise to discretion on reported positive earnings. However, after analyzing the two components of earnings management, it was brought to notice that changes in working capital and cash flow from operations have been used to manage earnings effectively. However, investigating on motivation the two theories that could efficiently explain the outcome by decreasing the costs forced for the transaction with stakeholders in the enterprise. The second theory being that assumes aversion to relative and absolute losses on the prospect theory (Subekti 2013). The implications identified with the theory are that earnings management pooled cross-sectional approach could have been applied to meet the former management forecasts of the earnings. In addition, the deviations could have been relatively observed from the forecasts to observe a pointed discontinuity of lower absorption of small discrepancies of reported earnings and a higher absorption of positive discrepancies. The suggestion of the study relates to the precision of defined goal of earning in the different setting in an empirical issue (Gilliam et al. 2015). The results depict the market via financial statements. However, with some amount of degree of freedom in the choice of accounting method, the firms use incentives to distort the financial statements or particularly slot in earnings management. However, if the regulation of financial statements makes earnings management of this sort then alternative solutions available to managers is to misrepresent the decisions. As an accountant of the study, the earnings management did not build a systematic process of performing the study. However, one thing that I would like to take away is that less importance in given to financial reporting and accounting such that modest insight for standard setters in earning management is excluded. This not only defines the existence and reason but highlights the occurrence of a variety of reasons like stock market perceptions, the likelihood of lending agreements and regulatory intervention (Marinakis 2011). Nevertheless, the decision should be based on the criteria that satisfies and defines the desired accounting treatment of the transaction. In this way, the firm will get the reporting it wants and earnings management would be substituted by a designer transaction such that reporting of one transaction suggests other kind of transaction. The net result of designer transaction will not only give good intentions of the regulation but will also provide faithfully re presented transactions that fail to some degree (Van Mourik and Walton 2013). However, according to the reexaminination done by Siriviriyakul (2013) it depicts that small profit firms do not contstitute a higher proportion of earnings than any other firms. However, a set of novel designed tests are unable to confirm that se of real earnings management to avoid losses. The research paper seems to be restricted even if tested on 1000 observations. Hence, the aspect that could have brought facets to the study other than cash stream from operations and working capital would have incomes with different manageable accrual levels, accounts receivables and inventory that could change negative pre-managed incomes to changes in positive accounted incomes (De Jong et al. 2014). References Burgstahler, D. and Dichev, I., 1997. Earnings management to avoid earnings decreases and losses.Journal of accounting and economics,24(1), pp.99-126. De Jong, A., Mertens, G., Van der Poel, M. and Van Dijk, R., 2014. How does earnings management influence investors perceptions of firm value? Survey evidence from financial analysts.Review of Accounting Studies,19(2), pp.606-627. Gilliam, T.A., Heflin, F. and Paterson, J.S., 2015. Evidence that the zero-earnings discontinuity has disappeared.Journal of Accounting and Economics,60(1), pp.117-132. Hamdi, F.M. and Zarai, M.A., 2012. Earnings management to avoid earnings decreases and losses: empirical evidence from Islamic banking industry.Research Journal of Finance and Accounting,3(3), pp.88-107. Li, W., 2014. A theory on the discontinuity in earnings distributions.Contemporary Accounting Research,31(2), pp.469-497. Marinakis, P., 2011.An investigation of earnings management and earnings manipulation in the UK(Doctoral dissertation, University of Nottingham). Siriviriyakul, S., 2013. Re-examining real earnings management to avoid losses.Available at SSRN. Subekti, I., 2013. Accrual and Real Earnings Management: One of The Perspectives of Prospect Theory.Journal of Economics, Business, and Accountancy Ventura,15(3), pp.443-456. Van Mourik, C. and Walton, P., 2013.The Routledge Companion to Accounting, Reporting and Regulation. Routledge