Earnings Management

Loading the player...

What is 'Earnings Management'

Earnings management is 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.
 

BREAKING DOWN '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. Accounting Earnings

    The amount of money a company has earned during a given period, ...
  2. Quality Of Earnings

    The amount of earnings attributable to higher sales or lower ...
  3. Quarterly Earnings Report

    A quarterly filing made by public companies to report their performance. ...
  4. Normalized Earnings

    1. Earnings adjusted for cyclical ups and downs in the economy. ...
  5. Forward Earnings

    A company's forecasted, or estimated, earnings made by analysts ...
  6. Earnings Call

    A conference call between the management of a public company, ...
Related Articles
  1. Investing

    What is Earnings Management?

    Earnings management is the use of accounting techniques to make a company’s financial reports look better.
  2. Personal Finance

    Everything Investors Need To Know About Earnings

    We go over the concepts behind the excitement over the most important figure in the stock market.
  3. Managing Wealth

    How to Use Earnings Season to Make Better Decisions

    Earnings season reflects the state of the stock market, but also demonstrates how the overall economy is performing.
  4. Investing

    Financial Statement Manipulation An Ever-Present Problem For Investors

    The SEC has taken steps to eliminate this type of corporate fraud, but it remains a real risk for investors.
  5. Markets

    What are Earnings?

    The amount of profit that a company produces during a specific period, which is usually defined as a quarter (three calendar months) or a year.
  6. Investing

    Look For These Red Flags In The Income Statement

    Companies can overstate their revenues and understate their losses to boost investor confidence. Learn how to spot the these red flags in income statements.
  7. Investing

    Core Earnings Strip Away "Creative" Accounting

    This metric is an attempt to counteract creative accounting, but it poses its own set of challenges.
  8. Investing

    How Financial Statements Are Manipulated

    Financial statement manipulation is an ongoing problem, and investors who buy stocks or bonds should be aware of its signs and implications.
  9. Markets

    IBM Stock: An Earnings Case Study

    Learn the main drivers behind IBM's earnings model and why analysts predict a decline in 2016 followed by a strong recovery in 2017.
  10. Investing

    The Financial Characteristics Of A Successful Company

    There are many factors that contribute to a profitable business. Find out what they are here.
RELATED FAQS
  1. What is earnings management?

    Before diving into what earnings management is, it is important to have a solid understanding of what we mean when we refer ... Read Answer >>
  2. What is the difference between earnings and revenue?

    Understand how a company makes revenue and how it makes earnings. Learn the difference between revenue and earnings and how ... Read Answer >>
  3. How rapidly can expanding sales reduce a firm's earnings?

    In order to operate and make money, a company must spend money. Revenue - the dollar amount of sales - can be seen on a company's ... Read Answer >>
  4. Is maximizing stock price the same thing as maximizing profit?

    Simply put: yes. A company's stock price will factor in many different variables including the type of industry the firm ... Read Answer >>
  5. What is the difference between earnings and profit?

    Read about the differences between a company's earnings and its profit, and learn how the gap between earnings and profit ... Read Answer >>
  6. When is earnings season?

    Earnings season is the period of time during which a large number of publicly traded companies release their quarterly earning ... Read Answer >>
Hot Definitions
  1. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  2. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  3. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  4. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  5. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
  6. Underweight

    1. A situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's ...
Trading Center