Question

Why companies might engage in earnings management?

Answer 1

Companies use earnings management as an accounting tool to develop financial statements which provides a positive financial position of business. They use it to ease out the change in earnings and present a more productive profitable position in a particular period of time. In using earnings management, financial statements are produced to show inflated earnings by means of accounting principles to provide a positive and more consistent amount of growth in business.

Management may manipulate in use of accounting practices to meet financial needs of business which in turn might increase their stock price in the market. Another use of earnings management is to change the policy of the company in order to capitalize its earnings into assets rather than spend it as expense immediately.