Earnings Management

AAA

DEFINITION of 'Earnings Management'

The use of accounting techniques to produce financial reports that may paint an overly positive picture of a company's business activities and financial position. Earnings Management takes advantage of how accounting rules can be applied and are legitimately flexible when companies can incur expenses and recognize revenue.


It can be difficult to differentiate these allowable practices from earnings fraud or manipulation. Earnings management theoretically represents this gray area, but it is often used as a synonym for earnings manipulation or earnings fraud.

INVESTOPEDIA EXPLAINS 'Earnings Management'

Companies use earnings management to smooth out fluctuations in earnings and/or to meet stock analysts' earnings projections. Large fluctuations in income and expenses may be a normal part of a company's operations, but the changes may alarm investors who prefer to see stability and growth, tempting managers to take advantage of accounting gimmicks. Also, a company's stock price will often rise or fall after an earnings announcement, depending on whether it meets, exceeds or falls short of expectations.





Management can feel pressure to manipulate the company's accounting practices and, consequently, its financial reports in order to meet these expectations and keep the company's stock price up. If earning management is considered excessive, the SEC may issue fines as a punishment, but it still can be difficult for investors to identify the companies misrepresentations.

RELATED TERMS
  1. Earnings Per Share - EPS

    The portion of a company's profit allocated to each outstanding ...
  2. Earnings Announcement

    An official public statement of a company's profitability for ...
  3. Manipulation

    The act of artificially inflating or deflating the price of a ...
  4. Earnings

    The amount of profit that a company produces during a specific ...
  5. Quality Of Earnings

    The amount of earnings attributable to higher sales or lower ...
  6. Operating Cost

    Expenses associated with administering a business on a day to ...
RELATED FAQS
  1. What are the differences between absorption costing and variable costing?

    Absorption costing includes all costs, including fixed costs, in figuring the cost of production, while variable costing ... Read Full Answer >>
  2. What financial ratios are most useful for an investor to evaluate the liquidity of ...

    An insurance company, like any other nonfinancial company, needs access to liquidity in case it needs to fulfill its debt ... Read Full Answer >>
  3. What is the relationship between degree of operating leverage and profits?

    The degree of operating leverage directly reflects a company's cost structure, and cost structure is a significant variable ... Read Full Answer >>
  4. How does transfer pricing help business?

    Transfer pricing involves the trade of goods or services between two related companies, and both can come out the winner. ... Read Full Answer >>
  5. Can a business ever be too small to issue commercial paper?

    There are effective – though not legal – restrictions on the size of commercial paper issuers. Any company can issue commercial ... Read Full Answer >>
  6. How do I calculate my effective tax rate using Excel?

    Your effective tax rate can be calculated using Microsoft Excel through a few standard functions and an accurate breakdown ... Read Full Answer >>
Related Articles
  1. Markets

    The 4 Basic Elements Of Stock Value

    Investors use these four measures to determine a stock's worth. Find out how to use them.
  2. Personal Finance

    Top 8 Ways Companies Cook The Books

    Find out more about the fraudulent accounting methods some companies use to fool investors.
  3. Fundamental Analysis

    Detecting Accounting Manipulation

    "One-time charges" and "investment gains" are two strategies companies can use to distort their numbers.
  4. Investing

    A Case Study: Earnings Manipulation And The Role Of The Media

    Here we explore why the media focuses on certain earnings manipulation cases in post-Enron Wall Street.
  5. Investing Basics

    Explaining Write-Downs

    A write-down is a reduction in the book value of an asset because it is overvalued compared to the market value.
  6. Economics

    What are Noncurrent Assets?

    Noncurrent assets are property that a company owns that will last for more than one year.
  7. Investing Basics

    How Much Do CPAs Make?

    If you're considering becoming a CPA, here's what you might expect to earn.
  8. Trading Systems & Software

    Steps to Starting Up an Independent Broker Dealer

    Launching your own broker-dealer is a lot of work, but the potential payoff is great, both personally and financially.
  9. Economics

    Explaining Activity-Based Costing

    Activity-based costing (ABC) is a managerial accounting method that assigns certain indirect costs to the products incurring the bulk of those costs.
  10. Economics

    What is a Contra Account?

    A contra account is an offset that reduces the value of a related account.

You May Also Like

Hot Definitions
  1. Butterfly Spread

    A neutral option strategy combining bull and bear spreads. Butterfly spreads use four option contracts with the same expiration ...
  2. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
  3. Moving Average - MA

    A widely used indicator in technical analysis that helps smooth out price action by filtering out the “noise” from random ...
  4. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  5. Productivity

    An economic measure of output per unit of input. Inputs include labor and capital, while output is typically measured in ...
  6. Variance

    The spread between numbers in a data set, measuring Variance is calculated by taking the differences between each number ...
Trading Center