Earnings Management Revisited: Further Suggestions in the Wake of Corporate Meltdowns

In the Jan./Feb. 2000 issue of The White Paper, the three authors of Earnings Management: When does Juggling the Numbers Become Fraud?" had the foresight to focus on a disturbing global trend. Certain large corporations would have done well to heed their words. ed.  

As we noted in our previous article in the Jan./Feb. 2000 issue of The White Paper, earnings management involves entity managers and accountants asking "How can we best report desired results?" rather than "How can we best report economic reality (the actual results)?"¹ When reported results are intentionally misstated, earnings management becomes fraud. Corporate scandals including Enron, and WorldCom, and these entities' external auditor, Arthur Andersen, are instructive on such accounting and business abuses. They also point to the critical need for further involvement of fraud examiners in assuring the verity of published financial information.

Accordingly, here we provide an update on earnings management, including the implications of the U.S. Sarbanes-Oxley Act of 2002, and offer suggestions for improving performance reporting in all countries.

Building Awareness of Earnings Management That has Become Fraud