From the course: Finance and Accounting Tips

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Earnings management

Earnings management

From the course: Finance and Accounting Tips

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Earnings management

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- Here's an old accounting joke. A business owner is hiring a new manager. She conducts an interview with each candidate by asking just one question. What's two plus two? Most of the candidates reply with the obvious answer, two plus two is four. But the final candidate was an accountant. The business owner asked the same question, what's two plus two? The accountant walked quietly to the door and locked it. Then the accountant tip toed to the windows to make sure they were securely closed. Finally, the accountant leaned in close to the business owner and whispered the following, two plus two what do you need it to be? That's the essence of earning management. Massaging the numbers, making estimates carefully and strategically timing business events to make the report of net income number come in at some desired level. Managers of companies often are motivated to manage reported earnings. Sources of this motivation include pressure to, meet internal targets. Meet external…

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