Contents

• Introduction
• Summary
• Critique
• Conclusion
• References

Description

Earnings management helps in portraying false financial health of the companies (David Katz, 2006). The study aims at providing evidence that firms manage reported earnings in order not to show decreases and losses, else the market value of firm’s holdings comes down. The study tries to prove that the two components of earnings, cash flow from operations and changes in working capital are used to achieve this objective. It makes use of two theories viz., stakeholder use of information heuristics and prospect theory as motivation for avoidance of earnings decreases and losses. The study provides sound evidence with anecdotes and examples on how cash flow management and working capital computations are tampered with to show increases in place of decreases and losses in earnings management. The study provides a sound and simplistic argument with examples. The sources of data are well documented making the study an authentic one, instead of appearing to be based on factious data. The study systematically approaches the problem by first providing evidence that discretion is used earnings management to avoid decreases and losses and then by providing evidence on the methods of earning management to avoid losses. The study is a systematic and conclusive one. However, the study needs to be extended to cover broader areas.