Question

Why firms manipulate earnings?

Answer 1

Answer-:

In simple words, manipulation of earnings is called earning management.

Firms do earning management because of various reasons. Power of CEO or top level management plays crucial role in earning manipulation. They either increase or decrease the earning of firms from the actual earnings.

Firms do earning manipulation because of following reasons-:

1. Tax saving -: Firms reduce their income so that they have to pay less tax which leads to tax evasion.
2. Better presentation of affairs of firms -: Firms inflate their earnings by which their accounting ratios gets boosted which shows better impression in the eyes of persons who have vested interest in the firm like partners, creditors, etc.

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