Opportunity of Earnings Management: A Corporate Analysis

Opportunity Of Earnings Management: A Corporate Analysis

Executive Summary

In Singapore, the reporting of financial statements is in compliance with the financial reporting system with the objective of providing financial information which is useful to a wide range of users in making economic decisions.

Earnings management however, is one behavior which might undermine the credibility of financial statements. Ex-SEC Chairman, Levitt once quoted: "The quality of earnings is eroding because managing give way to manipulation and integrity may be losing out to illusion."

This paper studies the financial statements of Unifiber and economic conditions surrounding the organization which might motivate earnings management behavior. We will then discuss on corporate governance mechanisms instituted in UniFiber to enhance the quality of the reported information.

Understanding of Earnings Management

is reported.

Definition

Earnings management can be defined based on a spectrum of different motivations excluding illegal fraudulence as seen in the following table.

Here, we define earnings management as the process of taking deliberate steps within the constraints of the generally accepted accounting principles (FRS) to bring about a desired level of reported earnings.

Reasons for Earnings Management

Management may engage in earnings management for personal interest or company's benefit.

Company's Benefit:

* Maximize share price and meet analyst earnings forecast.

* Prevent increase in cost of capital or diminishing prospects for new debt issues when reported earnings are viewed negatively.

* Receive favorable credit policy based on better reported financial position.

* To avoid violating lending covenants.

Personal Interest:

* Maximize compensation such as bonuses or stock options since they are usually tied...