There is a need for accountants to realize the ethical aspects of earnings management as well as truthful reporting. Based on the fact that stakeholders use reported earnings to make certain decisions, there are high chances that accounting and operating distortions can be damaging to their individual interests (Ahadiat & Hefzi, 2013). In this view, it is vital to understand the importance of providing the right information concerning earnings.Distorting accounting earnings are morally wrong for the reason that it may mislead users of financial statements, something that can make organizations experience huge losses. According to Ahadia and Hefzi (2013), accounting earnings are used by many stakeholders to evaluate the financial status of companies. Therefore, distorting them implies that the parties concerned will be misled into making inaccurate assessments of their firms’ economic health. Based on the fact that stakeholders make crucial decisions using reported earnings, managing them is likely to damage their interests. In such situations, there is the likelihood of making decisions that would not have made. Additionally, accountants may feel forced by their firms to participate in earnings management to make reports look more favorable (Ahadiat & Hefzi, 2013). As a result, the stakeholders may not make the right decision because the information is distorted. There is the likelihood of the accountants being concerned that their individual performance assessment might be associated with how their statements are prepared and not accuracy.
Ahadia and Hefzi (2013) note that when earnings are managed, the executive might accelerate the recognition of bad news more than bad news. Concentrating on bad news is likely to influence an organization’s earnings conservation by biasing the extent of its earnings conservatism upwards. The control takes place when there is an income-decreasing earnings management. On the other hand, when there is an income-increasing earnings distortion, executives are more likely to focus on the good news while at the same time defer the identification of bad news in earnings. The acknowledgment of the good news affects company’s earnings conservatism by distorting the extent of its earnings conservatism downwards (Ahadiat & Hefzi, 2013). Therefore, it is important that accountants understand the ethical issues regarding earnings to take companies they work for where they want to be.
- Ahadiat, N., & Hefzi, H. (2013). An Investigation of Earnings Management Practices: Examining Generally Accepted Accounting Principles. International Journal of Business
and Social Science, 3(14), 54-123.