Earnings management is the practice of intentionally influencing a firm’s financial reporting choices to reflect a particular view of the firm’s performance.This was the topic of my PhD dissertation and, at that time (the mid-1990s), earnings management was largely of academic interest. However, a series of significant scandals involving deliberate financial reporting misstatements around the turn of the century (Enron, Worldcom, etc.) followed by the global financial crisis a decade later gave earnings management (aka ‘creative accounting’) a much more public focus, and there was a strong push away from managerial discretion toward reporting based solely on mandated financial reporting standards.
However, the tide seems to have been turning back in the last few years with dissatisfaction with the strictures of financial reporting standards (for example, Noise, Numbers and Cut-Through (CAANZ)) and a desire to tell a richer story of firm performance (for example, the Integrated Reporting initiative).
Papers from my dissertation included:
- Black, Ervin L. and McCulloch, Brian W., “Earnings Management Relations of Accruals Components: A Multi-Period Setting” (December 4, 2003). [Download from SSRN]