Detecting Managed Earnings With CEO Profiles

Earnings management is the use of managerial discretion to apply accounting standards or construct business transactions in a way that alters reports on the financial health of an organisation [1]. Earnings management can include both legitimate and illegitimate methods “to smooth earnings over accounting periods or to achieve a forecasted result.” [2] For example, in periods of good financial performance, managers may increase provisions for bad debts or for obsolete inventory to create reserves for future use. Alternatively, in periods of poor financial performance, managers may reduce or reverse those provisions to inflate reported earnings. Similarly, managers might also construct … Read more