Page 29 - cfi-Accounting-eBook
P. 29
The Corporate Finance Institute Accounting
Reasons for Upward Earnings Reasons for Downward Earnings Management
Management
Bonuses given out in relation Reduction in taxes
to net income
Meeting debt covenants Increase the chances of obtaining government assistance
Enhancing the perception of Taking a “big bath” in a bad year by recording more expense than usual
the company (i.e. reducing the so future years are more likely to show higher profitability
perception of risk)
Securities law and financial accounting theory
Securities laws around the world are fully aware of this information
asymmetry phenomenon in our economy and have put in place
measures to protect investors.
For example, public companies must adhere to securities laws set
out by the Canadian Securities Administrators (CSA) in Canada or the
Securities and Exchange Commission (SEC) in the United States.
An example of a specific measure is when these laws set out “black-out
periods” where management and other individuals with access to more
sources of information are not allowed to buy or sell company shares
because they have an information advantage over users that only have
access to the financial statements.
corporatefinanceinstitute.com 29
