Question

Assess (both pro and con) the Machiavellian argument above that defends managing earning.

Answer 1

The pros of the Machiavellian argument are that it focuses on ends and if the desired ends are met then the means are certainly justified. Use of managerial discretion is allowed by GAAP and hence it is but rational to use this discretion to achieve earnings objectives. This also protects the interests of the shareholders to a large extent.

In terms of cons the Machiavellian argument fails to systematically differentiate between bad earnings management and good earnings management. This will likely encourage the management to undertake activities to hide true operating performance and mislead financial statement users. Another con is that losing sight of means in the long run might dilute the level of corporate governance within a company and this can be dilutive to value creation efforts in the long run.