One definition of earnings management is that it occurs when managers use:
A) judgment in financial reporting to alter financial reports to mislead stakeholder.
B) an accounting method that is inconsistent with other industry members.
C) more conservative accounting estimates than other companies.
D) pro forma accounting results as opposed to GAAP results.

Question

Quizplus · Accepted Answer

Earnings management involves the use of discretion by managers to manipulate financial reports in order to mislead stakeholders. This can include using judgment to choose accounting methods, recognizing revenue or expenses earlier or later than appropriate, or altering estimates to achieve a desired result. The goal is to improve the appearance of financial performance, either to meet targets (such as earnings expectations) or to hide negative information (such as poor operating results or high debt levels). Options B, C, and D are not necessarily indicators of earnings management, as they could be the result of legitimate differences in accounting policies or business models.

One Definition of Earnings Management Is That It Occurs When