The case discusses the risks associated with the morality of managing earnings. It is clear that the morals guiding the timing of non-operating events and accounting policies have not been adhered to. The managers do not also give any attention to the ethical frameworks relevant in reporting short-term earnings. Accountants usually use the generally accepted accounting principles (GAAP) in preparing the financial statements and disclosures. The senior executives usually determine the level of short term reported earnings through the management, leadership, and allocation of resources (Badertscher, 2011). In addition, the timing of the non-operating events and selection of accounting methods are needed in measuring short-term earnings. However, some observers of financial reporting may argue that laws and regulations have restricted accounting practices and frameworks. Any deviations in the quality of financial information usually lead to disagreements among the groups. Therefore, this paper discusses the significance of understanding the morals and ethics of managing short-term earnings in an organization.
First, the essence of moral approach to management helps in achieving a balance between individuals and the obligations of other stakeholders in the corporation. This includes customers, suppliers, creditors or investors. Some of the managers may take unproductive actions to improve the short-term earnings. However, if their actions lead to adverse results for the organization, their actions might be unethical.
Secondly, the accounting manipulations have adverse effects on the ethical approach of the managers. In most occasions, the recipients of earning reports do not have any information relating to the earnings. Thus, the accountants do not realize any accounting manipulations. In spite of the accounting principles and methods applied being consistent with GAAP, the actions may be unethical. This is because the interests of the stakeholders are not considered when preparing the short-term earning reports. Thirdly, adverse reasoning accepts the operating manipulations in the earning reports. The managers usually ignore the operating manipulations that affect the interests of stakeholders. The operating manipulations should be well managed to ensure the short-term earnings reports reflect the actual transactions.
In addition, it is important to develop clear accounting and operating regulations. Thus, the managers must be involved in the standard setting processes to develop appropriate short-term earnings measurements. The differences lead to negative effect that affects the quality of financial information. Lastly, the managers are usually unable to agree on the appropriate types of earnings management processes. Lack of agreement within the corporation affects the moral obligations of the executives and managers. Considering the differences in views, the ethical mangers are forced to loosen their moral principles and standards in the financial reporting practices.
Management’s Ability to Manage Earnings in the Long Term
Considering the inherent operational manipulations, the management should have the ability to manage earnings in the long term. The management should adhere to appropriate standards in enabling the quality of earnings. In order to understand the morals of short-term earnings management, it is important to evaluate and control the quality of financial information. Most importantly, the managers should employ external experts including auditors necessary in identifying the acceptability of the operating manipulations. In addition, the managers are required to use their experience and judgment in making positive long-term benefits. Strong corporate culture also improves the management’s ability in handling the operational manipulations for long-term success (Badertscher, 2011). The corporate culture is also concerned with the management of excellence for strategic success of the organization.
Badertscher, B. A. (2011). Overvaluation and the choice of alternative earnings management mechanisms. The Accounting Review, 86(5), 1491-1518.