Earnings Management


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.

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.

  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. Quality Of Earnings

    The amount of earnings attributable to higher sales or lower ...
  5. Earnings

    The amount of profit that a company produces during a specific ...
  6. Encumbrance

    A claim against a property by a party that is not the owner. ...
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