Loomis thinks that the accounting profession is under jeopardy due to lack of honesty in the Praca tice (75). The author is emphatic that some accountants have opted to ‘manage earnings’ of companies they represent so that the public and stakeholders may get a fair impression that their corporations are performing well in the market. Interestingly, this is a similar argument presented by Kolins (37). The author observes that a raft of measures and auditing rules were recently adopted to address the loopholes in the management of earnings in corporations. The latest rules and regulations were adopted to combat management in earnings.
As much as the aspect of management earnings is a real ethical threat in the field of professional accounting, it is also pertinent to explore the roles played by audit committees in public companies. It is surprising that the new rules of engagement in the auditing of public corporations were bitterly embraced by most Corporate Boards of Directors. The AICPA Auditing Standards Board and the Exchange Commission should never be lenient with rogue accountants who are ready to lower the reputation of other honest and highly professional accountants. Dechow and Skinner also point out that the issue of earnings management has been regarded and treated differently by most accounting academics (235). However, this should never be the case. A uniform approach should be taken in regards to the issue of earnings management. In any case, any wrong, inaccurate or exaggerated reporting on the performance of companies should expressly be considered as a fraudulent activity. To some extent, regulators and practitioners seem to be on an agreement on how earnings management should be treated (Dechow and Skinner 237).
It is clearly understood that there is always intense pressure to attain the expectations of Wall Street. However, impressive performance and increased reputation of a corporation in the public domain usually comes with a cost. The jail option reiterated by Loomis (76) may not be a proper approach of combating malpractices in reporting the performance of companies. There are several cases when the convicted individuals ‘buy’ their freedom from the court corridors even before they are sentenced to jail. Some instances are successfully appealed and dropped to the detriment of corporations that eventually incur millions of losses.
The Generally Accepted Accounting Principles should be adhered to by all accountants. In particular, the growing trend among auditors is a severe threat to both the profession and the future performance of the multi-billion dollar companies. Some decades ago, a lack of credibility in the financial reporting system was mainly a preserve of the developing and under-developed economies (Loomis 79). This could be reasonably understood largely because the middle and low-income economies were still struggling with high levels of poverty and poor human resource. As it stands now, even the developed economies are experiencing credibility challenges when it comes to the aspect of financial reporting.
Apart from introducing strict rules and regulations in the auditing and reporting of the financial performance of corporations, Kolins posits that the whole financial community should foster a close working relationship. Cooperation among key financial players will ensure that all the accredited committees work as a unit in combating the challenge. As much as collaboration may minimize the vice, the audit committees should be strengthened to improve audit quality. Also, the current accounting rules should be tightened. It has always been emphasized that the integrity of numbers in financial reporting is a crucial metric that all auditing officials should respect. The present auditing rules as stipulated in the Generally Accepted Accounting Principles are viable. However, the same accounting principles are still being flouted by some of the senior auditors in the profession.
It is apparent that the corporate culture should also undergo a paradigm shift. The corporate management of the accounting culture has hardly been practiced among the major financial players. The existing accounting principles and ethics have not yielded the expected outcomes concerning earnings management.
The problem of earnings management has been depicted as an urgent issue by several scholars in the field of accounting. Nevertheless, there is still a lot to be done to fully address the challenge. Accredited regulatory bodies such as the National Association of Securities Dealers, the New York Stock Exchange and SEC have proved to be less effective in dealing with the menace. Although these bodies play immense roles in the regulation of accounting practices, they lack prosecution powers. The court system is the only organ of the government, which is mandated to prosecute offenders. Therefore, the existing accounting laws are only effective in pointing out offenders and not prosecuting them.
According to Kolins, the corporate reporting process will only regain its reputation if the auditing committees are strengthened (37). If the latter is the case, then it implies that the practice of ‘managed earnings’ can hardly take place in the presence of all the strengthened audit committees. Surprisingly, the latter is not true at all. It is vividly understood that earnings management and the capital markets incentives have never been factored together by audit committees when projecting the future performance of their respective corporations (Dechow and Skinner 236). The academic research efforts should focus on the two financial parameters.
In an exciting turn of events, Dechow and Skinner articulate that the debate surrounding managed earnings has been exaggerated (239). The authors are categorical that earnings management and fraudulent accounting are two separate entities. When fictitious inventory is recorded, it amounts to fraudulent accounting according to their definitions. Moreover, sales invoices should never be backdated. Recording fictitious sales are also tantamount to fraudulent accounting. These explanations are acceptable. However, there are instances when aggressive accounting has a very narrow distinction from fraudulent accounting. For example, when provisions are drawn down in an aggressive manner, it can easily be interpreted as an attempted fraud. Moreover, when understatement is given for bad debts, it creates a hidden impression that a company is doing quite well even though the debt factor is hampering performance. Worse still, expenditures related to research and development as well as advertisements should not be postponed.
From the above reflections, critiques, and responses, it can be seen that the management of earnings is still a debatable issue in the field of accounting. Moreover, the accounting rules and strong audit committees have not been sufficient in addressing the challenge of incredible financial reporting from corporations. Practitioners and regulators in the accounting profession should now focus a lot on the management and improvement of the corporate culture.
Works Cited
Dechow, Patricia and Douglas, Skinner. “Earnings Management: Reconciling the views of Accounting Academics, Practitioners and Regulators.” American Accounting Association 14.2(2000): 235-250. Print.
Kolins, Wayne. “Earnings management and audit committees.”Directors & Boards 25.12 (2001): 37. Print.
Loomis, Carol. “Lies, Damned Lies, and Managed Earnings.” Fortune 140.3(1999): 74-92. Print.