Ethics and Earnings Management
Is it ethical to “manage” the earnings number?
This course tackles the question: Is it ethical to “manage” the earnings number – that is, to use legitimate discretion in the preparation of the financial statements to manage the numbers in a way that serves the interests of the manager independent of whether it serves the interest of the firm’s owners? We begin by creating an ethical framework based on the professional code of ethics. We then cover the what, why, how, and when of earnings management behavior, describing and illustrating the variety of ways in which managers use their discretion in operating, investing, financing, and reporting decisions to influence the financial reports. In the vast majority of these cases, we rely on real-world examples, taken from publicly-available financial statements that received unqualified audit opinions.
For the various categories of earnings management, we consider how they can be evaluated within the ethical framework we established in the beginning of the course. The result is an informed and thoughtful approach to assessing whether a given earnings management practice is consistent with professional ethics, a valuable tool whether you are an external auditor reviewing a set of statements, a preparer of the statements, or an outsider attempting to determine the usefulness of the statements.
Field of Study: Ethics (Regulatory), Accounting
Jamie Pratt was the Alva L. Prickett Chair of Accounting at the Kelley School of Business at Indiana University in Bloomington, Indiana, and now holds the title of Distinguished Emeritus Professor. He received his doctorate in business from Indiana University in 1977, and has held faculty positions at the University of Washington (Seattle), the University of Zurich (Switzerland), Northwestern University and INSEAD (Fontainebleau, France), returning to Indiana in 1991. Jamie’s research interests are in financial reporting and analysis, where he has published over 30 articles in the top academic research journals (including The Accounting Review, Journal of Accounting Research, Contemporary Accounting Research, Accounting, Organizations and Society, and Issues in Accounting Education), and he has taught courses in financial reporting and analysis at every level (introductory, intermediate, advanced) in every program (undergraduate, MBA, PhD). He has received over 30 teaching awards and recognitions, and also taught executive education courses throughout the world. Research and/or teaching recognitions have also come from the following organizations: American Accounting Association, American Taxation Association, Big 4 accounting firms (KPMG and PriceWaterhouseCoopers), Indiana Society of CPAs, the Universities of Manchester (England), Kwansei Gakuin (Japan) and Kentucky, and Business Week magazine. His resume also includes two textbooks (one in its 11th edition), two computer-based interactive case platforms, a financial analysis case book, and several instructor guides that support these products.