Advanced Financial Reporting & Regulation Assignment

Advanced Financial Reporting & Regulation - Assignment Example The present research has identified that according to the SEC, the BMS company also engaged in ‘cookie jar’ accounting. That is, it created phony reserves for disposals of unneeded plants and divisions during high-profit quarters. These would be carried to decrease the operating expenses in results of the quarters where BMS’ income or earnings figures are insufficient to meet the forecasted amounts. Required: a. Using relevant academic papers, discuss the incentives why managers would resort to extreme earnings management technique such as this. b. Critically evaluate the effectiveness of ‘stuffing the channels’ and ‘cookie jar accounting’ as earnings management devices. Earnings management is any legal activity via which the entity administers its profits earned, retained and distributed and thereafter carries out it's financial reporting, making decisions regarding the contents, details, and disclosures to be provided in the deliverable s to give a true and fair view of its operations. According to Lev, earnings play a very important role not only because they shape up the success of any business but also because they can have drastic effects if the management’s reporting of earnings get manipulated. Therefore, it is of utmost significance for all key personnel of the entity to excel at earnings management, taking into account that it doesn’t involve any manipulative measures and fraudulent practices. According to scenario given in the question, the pharmaceutical company mentioned was similarly involved in maneuvering its books of accounts by using tactics such as ‘stuffing the channels’ and ‘cookie jar’ accounting, resulting into non-compliances, being penalized for the same. The question here arises as to why would managers of this enterprise be engaged in such practices of window-dressing the company’s books of accounts though aware of its adverse consequences of n on-compliance? Following are given few incentives which may urge managers to be indulged in wrongful earnings management: Fulfilling Expectations of Capital Markets: The most common reason for a majority of the times in such instances is motivation to satisfy capital markets. Managers are mostly under extreme pressures to create value for existing and prospective shareholders and when they find no way to do so in real terms, they end up manipulating reporting of earnings thereby affecting favorably stock’s market price in the short run.