| In recent years, much attention has been | | | | practices as immoral and unethical as well as they |
| devoted to ethical conduct of accountants. Critics | | | | distorting the application of GAAP. However, this |
| have alleged that ethics have deteriorated and | | | | line of arguments seriously ignore too many facts, |
| that the interests of users of financial statements | | | | mainly these that can be found in the accounting |
| and financial reports have been subordinated to | | | | theory--the mother. On the one hand, one of the |
| the desires of prepares of such reports to | | | | approaches for accounting theory is the ethical |
| present a favorable picture of financial status of | | | | approach which emphasis on concepts of justice, |
| reporting entity. Perhaps such critics have | | | | fairness and truth. Each one of these concepts |
| received their increasing power, by far, from the | | | | has found its way into the conceptual framework |
| earnings management literature – as an | | | | created by FASB in forms such, reliability, |
| extension for Book Cooking – which has been | | | | relevancy and natural, nonetheless the theory |
| the subject of much accounting research over | | | | itself had revealed high confusion regarding ethics |
| the past three decades. In that literature, there is | | | | as in the question of "What is the term Truth |
| documented ample evidence that firms | | | | mean? And it has confessed that ethics are |
| intentionally "manage" or "dampen" fluctuations | | | | something of judgment in the mind of |
| around some predetermine earnings target, and | | | | practitioners of accounting. This confusion also has |
| earnings management has been described as | | | | transmitted into an ongoing confliction between |
| distorting the application of generally accepted | | | | reliability and relevancy within the qualitative |
| principles accordingly. Within this vein, on the other | | | | characteristic of accounting information. On the |
| hand, the recent scandals at Enron and WorldCom | | | | other hand, the economic approach for the |
| have generated a public perception that earnings | | | | accounting theory calls for employing accounting |
| management behavior is utilized opportunistically | | | | (through the financial reports) in macroeconomic |
| by firm managers for their own self-interest | | | | policies, that is, by considering the objective of |
| rather than for the interest of the shareholders. | | | | reporting stable earnings across the years |
| Together, these facts rise the par of pressure | | | | legitimizes the use of reserves and flexible |
| over the financial and investment communities, | | | | depreciation polices. Isn’t that what being |
| mainly the SEC, and pushed them toward | | | | known as income smoothing (a special form of |
| tightening accounting standards [for "example" | | | | earnings management)? And, wasn’t it |
| Sarbanes-Oxley Act – 2002, a development | | | | originally made in accounting theory? In addition, |
| of an extensive inspection program by Public | | | | this is Paul Rosenfield – who was the director |
| Company Accounting Oversight Board (PCAOB), | | | | of the AICPA accounting standards division for 14 |
| addition requirements made by NYSE and | | | | years – in an article titled "What Drives |
| NASDAQ for member firms, and the International | | | | Earnings Management?" explains deeply how U.S. |
| Accounting Standards Board (IASB 2003) | | | | GAAP as currently designed fails pervasively to |
| improvements project which eliminated accounting | | | | provide the meaning of transparency in financial |
| options in several standards]. Finally, in short | | | | reporting. |
| words, earnings manipulation's practices have been | | | | According to the common belief, the central |
| as "immoral", "cheating" and "unethical in the eye | | | | question for standard setters and regulators is to |
| of most practitioners, theorists, and regulators in | | | | decide how much judgment to allow management |
| the accounting field where, such consensus had | | | | to exercise in financial reporting. Where, it is |
| been inherent in the early studies (1960s) about | | | | believed that standard setters are likely to be |
| these financial phenomena and found its official | | | | interested in evidence on how management uses |
| way as a part of standards on the hand of | | | | or misuses judgment permitted under accounting |
| institute of management accountants IMA by | | | | standards. Conceivably, after the empirical |
| issuing the "standards of ethical conduct for | | | | evidence had been well documented around the |
| practitioners of management accounting and | | | | GAAP flexibility as a main source of the increasing |
| financial management" in 1983 followed by an | | | | earnings management practices, and after the |
| issuing from financial executive institute FEI called | | | | total incurred costs of earnings management had |
| " code of ethics" in 1985, and then by American | | | | been considered huge (as in his 1998 |
| institute of certified public accountants AICPA | | | | “Numbers Game” speech, former SEC |
| which issued the revised "code of professional | | | | Chairman, Arthur Levitt charged that widely |
| ethics". Thenceforward, FASB, GASB, and auditing | | | | publicized accounting problems, which earnings |
| standard board have adhered to these rules and | | | | management is one of them, at a considerable |
| standards in ethics. | | | | number of firms ware in danger of undermining |
| Surely, the story of earnings management could | | | | U.S. capital markets), it was supposed that |
| not be fully told in few lines especially, when a | | | | standard setters will make fundamental |
| long line of literature in this vein is considered. | | | | amendments in the wide options in standards |
| However, it is worth to remember that neither | | | | rather than rise the power of inspection on |
| additional standards nor putting ethics in form of | | | | auditing firms. Furthermore, many of the revised |
| cods and standards have conduced to one | | | | statements of FASB that have been issued in |
| beneficial result concerning reducing these | | | | past few years allow additional flexibility and |
| practices, except that practices have become | | | | contains more options for managers, herby places |
| something of a religion for firms' executives. So, in | | | | substantial burden on auditors to detect such |
| regards to the ethical aspect of this story, is it | | | | practices. However, auditors may never be able |
| true that earnings management practices are | | | | to detect real earnings manipulations in which |
| unethical? If it is, who must charge the | | | | managers left the options and move toward |
| responsibility? And, for more than 40 years of | | | | managing short-run real economic activities. |
| extensive works in this area (i.e. earnings | | | | After all, to date this area has witnessed much of |
| manipulations in general), the exploration of a | | | | the accounting researches that have the ultimate |
| pragmatic solution has not been reached even | | | | goal of providing a bas for standard setters so |
| alluded, and there is no signal it will be so in the | | | | that these "unethical" practices can be reduced |
| foreseeable future, simply why?! Such questions | | | | efficiently… May it is well known that advertising |
| have no typical and specific direct answers among | | | | is defined sometimes as "legal lie", at the same |
| the literature genres and regulators' speeches. | | | | time, ads are rights for any firms. Such line of |
| Properly, the answers, for the most part, are | | | | reasoning can be applied to earnings management |
| considered not scientific to be mentioned!!, or | | | | by which executives legally attempt to draw a |
| perhaps For a "TRUE" problem, there is no | | | | favorable picture for their firms' performance. |
| solution. Whatever the reason was however, | | | | One last item, pragmatically, Arthur Levitt |
| these questions are the ultimate aims of this | | | | statement (1998), “While the problem of |
| article which attempts to draw, as possible, | | | | earnings management is not new, it has swelled in |
| scientific answers but bounded by the business | | | | a market that is unforgiving of companies that |
| and economics sciences framework. | | | | miss their estimates”, carried more than a |
| As it was mentioned before, most genres of | | | | sense of sympathy, it is much closed to concede |
| earnings management literature and financial | | | | that earnings management is factual behavior. |
| communities' speeches have convicted these | | | | |