This paper reviews the literature on earnings management and its implications for managers and relevant stakeholders.
Abstract: Accounting scandals such as Enron, Toshiba, Gowex or Pescanova are issues of special interest, given the impact that such fraudulent transactions have on society due, especially to earnings manipulation. The aim of this paper is to review the literature concerning earnings management and the implications of the latter for stakeholders and firms. Using the Web of Science database, I investigate the most cited papers on this topic. A classification of the causes that drive managers to manipulate earnings is presented. I also explore the papers that show the trade-off faced by managers among the two techniques usually recognised in the earnings management literature, real activity and accrual manipulation, and when they are normally used. One of the major implications of earnings management is the deterioration of information quality in the financial statements, which could mislead stakeholders’ decisions.
Keywords: Earnings management, accrual manipulation, real activity manipulation, consequences of earnings management, causes of earnings management
Author: Cinthia Valle Ruiz, PhD student of Business Administration doctorate, Complutense University of Madrid, Madrid, Spain, cinvalle (at) ucm.es