What Is Economic Surplus?

Earnings management (Earnings Management) is the behavior of the enterprise management authority to comply with accounting standards, by controlling or adjusting the externally reported accounting income information of the enterprise, in order to maximize the entity's own interests.

Earnings management

Authoritative definition

American accountant

Earlier in the accounting academia, earnings management was generally understood to be a purposeful intervention in external financial reporting

The research on the basic characteristics of earnings management helps to grasp the content and framework of earnings management research. Based on the previous discussion, the basic characteristics of earnings management include:

Motivating factor

In real society, many incentive factors for earnings management can be seen. Some are management incentives, and some are political cost incentives or other incentives. In management incentives, there is both the temptation to pay dividends and promotions, and the pressure to be dismissed. Among political cost incentives, there are many surplus managements directed at government regulation. In addition, earnings management can also be used as a bargaining tool for employers and employees. Under certain conditions, earnings management is also attractive. Because of this, there are so-called dividend-based earnings management, tax-saving earnings management, earnings management of troubled companies, risk management using earnings management, and companies

Major issues to be addressed in research

In the vast literature on earnings management research, they can be roughly divided into three broad categories. The first is smooth earnings. The research on income smoothing focuses on reducing the fluctuation of profit in different periods, the main purpose is to facilitate the forecast of future profit and reduce market risk. The second is earnings management based on the contracting view. Studies have found that some contracts are based on accounting data, while others are implicitly linked to accounting information. Among them, the former is explicit contracts, which include management compensation plans, debt agreements, taxation, and regulations. In the research, the supporting evidence that the above contract affects earnings management is generally found. Contracts indirectly related to accounting data also include labor contracts, agency competition and changes in supervisors, audit contracts, external stock offerings, corporate governance systems, and so on. Compared with the first type of contracts, the relationship between these contracts and earnings management is much more complicated. The third is the measurement method.

Most of the researches on earnings management in academia use empirical methods. The main issues to be addressed in empirical research on earnings management include two broad aspects:

On the one hand, profit is divided into manipulated and unmanipulated parts. Generally speaking, a company's reported earnings consist of two parts: cash flow and accounting adjustments to the cash flow. The total accrual part can be further divided into non-discretionary accruals and subjective accruals. Here we should explain the two concepts of non-subjective accrual part and subjective accrual part. Among them, the non-subjective accrual part adheres to the original purpose of creating accrual accounting, that is, to improve the quality of accounting information so that it can more accurately reflect the financial status of the enterprise at a specific point in time and the financial results of a specific period. Therefore, the non-subjective accrual part is to adjust the impact of the time difference due to the inconsistency between the time point of cash receipt and payment and the time point of transaction under the premise of respecting objective economic reality. This adjustment is relatively objective, emphasizing respect for objective economic realities and is done within the constraints of generally accepted accounting principles. Corresponds to the non-subjective accrual part. The subjective accrual part is based on the purpose of a specific private interest. In a certain period or times, the company deliberately arranges economic transactions and intentionally adjusts financial reports to create reports that meet its needs profit. This adjustment can be done within the bounds of GAAP using the flexibility of GAAP, but it may also go beyond the framework of GAAP. In the empirical research of earnings management, four main models and their improvement or derivative models are widely used.

The ultimate goal of earnings management

There is no doubt that the ultimate purpose of corporate earnings management is very clear, namely to obtain private benefits. It is generally believed that the subject that obtains private benefits through earnings management is the master

"On Corporate Earnings Management"

Author: Sun Hongmei Source: Shandong Business Accounting

Abstract: With the gradual establishment of China's market economy and the growing development of the capital market, the problems of surplus management that have occurred in many western countries have inevitably appeared in China. Earnings management is the act of the enterprise management authority to control or adjust the accounting income information reported by the enterprise on the basis of following accounting standards in order to maximize the entity's own interests. Its ultimate purpose is to obtain private benefits, and the specific purposes are to raise funds, avoid taxes, obtain political capital, and avoid debt contract constraints. Earnings management has many manifestations, which can be prevented by improving accounting standards, strengthening audit monitoring and increasing supervision. In addition to analyzing the meaning of earnings management, this article also discusses the characteristics, existence reasons, methods and impacts of earnings management, and puts forward the governance countermeasures of earnings management on this basis.

Keywords: earnings management; basic characteristics; governance countermeasures

introduction

In academia, earnings management is a research topic with a history of 20 years. As a hot topic of financial disclosure, it has attracted widespread attention from Chinese and foreign accounting scholars. Its basic theory is gradually mature and perfect. In research, we must figure out the basic theoretical issues of earnings management.

Meaning of earnings management

There are different definitions of earnings management in the accounting field. According to the definition of American accountant Katherine Shepp, earnings management is actually a "disclosure management" that aims to control the external financial reporting process in a targeted manner to obtain certain private benefits. . Another American accountant, Scott, thinks that earnings management is "the act of maximizing the operator's own interests or the market value of the enterprise through the choice of accounting policies within the scope allowed by GAPP." With the deepening of people's understanding and research on earnings management, earnings management has a more comprehensive and accurate concept. According to the research analysis, we believe that earnings management occurs when management authorities use professional judgment to prepare financial reports and plan transactions to change financial reports. It is intended to mislead the decisions of stakeholders based on the company's economic performance or to affect the consequences of contracts based on accounting report figures. Several aspects of this definition are worthy of discussion. First, there are various ways in which management can exercise professional judgment when preparing financial reports. For example, in order to estimate a large number of future economic matters, such as the life expectancy and residual value of long-term assets, deferred taxes, bad debt losses and asset impairment, professional judgment is required. In order to report the same economic business, the management must also choose between permitted accounting methods (such as straight-line depreciation and accelerated depreciation, inventory-first-in-first-out, first-in-first-out, and weighted average). Management must choose between costs during the recognition period or deferred expenses such as research and development costs, advertising costs, and maintenance costs. Finally, they must decide how to plan corporate transactions, for example, by planning a merger of companies to make them eligible for the equity method or the acquisition method, planning lease leases to list lease liabilities on or off-balance sheet, and planning equity investments to avoid Or prepare consolidated statements.

The second point that needs to be pointed out is that the definition believes that the goal of earnings management is to mislead those stakeholders based on the company's economic performance. Earnings management will occur if the management considers that the stakeholders cannot find their earnings management behavior. If the management authority has information that the external stakeholders cannot grasp at all, the earnings management cannot be seen by the outside world, and thus earnings management will occur. Furthermore, stakeholders may expect (and tolerate) a degree of earnings management.

Basic characteristics of earnings management

The research on the basic characteristics of earnings management helps to grasp the content and framework of earnings management research. Based on the above definitions and the discussion of this issue in the theoretical world, the basic characteristics of earnings management include:

1. From a sufficiently long period (the longest is the entire life cycle of an enterprise), earnings management does not increase or decrease the actual profit of the enterprise, but it will change the reflection and distribution of the actual profit of the enterprise in different accounting periods. In other words, earnings management affects the accounting data, especially the reported profit in accounting, not the actual profit of the enterprise. The choice of accounting methods, the use of accounting methods and changes in accounting estimates, the point in time of the application of accounting methods, and the control of the point in time when transactions occur are all typical earnings management methods.

2. The main body of earnings management is the enterprise management authority. It is not difficult to find from the existing research literature that the main character in every "drama" of earnings management is the company's manager, department manager and board of directors. Whether it is the selection of accounting methods, the changes in the use of accounting methods and accounting estimates, the point in time of the application of accounting methods, or the control of the point in time when transactions occur, the final decision is in their hands. Of course accountants also join in, but they should be regarded as supporting roles. Here, you can clarify the responsibilities that enterprise management authorities should bear on earnings management.

3. The object of earnings management is generally recognized accounting principles, accounting methods and accounting estimates. In addition, the choice of time, especially the time, is also one of the objects of earnings management. When studying earnings management, we must have both time and space concepts. Generally accepted accounting principles, accounting methods and accounting estimates are the spatial factors of earnings management; the control of the point in time of the application of accounting methods and the occurrence of transaction events can be regarded as the time factor of earnings management. It needs to be explained that earnings management is a combination of accounting and non-accounting methods to achieve the control and adjustment of accounting income within the scope allowed by GAAP. Therefore, the ultimate object of earnings management is the accounting data itself. What people call earnings management is, in the end, writing about accounting data.

4. The beneficiaries of earnings management are business managers, and sometimes they also take care of the interests of certain shareholders, but the victims are usually the government, such as paying less taxes or delaying the payment of taxes. The form of the interests of the beneficiaries is also very complicated. Some are direct economic benefits such as the increase in dividends of managers, and some are indirect benefits such as promotion of positions and soaring stock prices. Some are immediate, others are lurking for a long time.

Reasons for earnings management

Although earnings management is within the scope of generally accepted accounting standards, in the minds of most people, earnings management is an act that does not conform to ethical standards.After all, it reduces the reliability of accounting information, and shareholders are interacting with managers. When entering into a contract, it has been estimated that managers will perform earnings management, so why would shareholders still allow it to exist? The author believes that there are several reasons.

1. Promotion of other contracts

In the contractual relationship that constitutes an enterprise, the contract signed between the enterprise and the creditor is called a debt contract. When entering into a debt contract, in order to protect their own interests and prevent corporate managers from taking actions that harm their interests, such as increasing the scale of borrowing, using loans for higher-risk projects, and issuing large cash dividends, they are often included in the contract When entering into some protective restrictions, some important financial ratios are restricted. In order to obtain credits from creditors, when the financial report figures violate or are about to violate the restrictive provisions of the contract, they will use earnings management to reduce the risk of default. At this time, the efforts of the managerial layer of the enterprise are consistent with the goals of the shareholders, and the managerial layer has the information advantage and can better achieve the goal of maximizing shareholder value. Therefore, for shareholders, managers need to work hard to achieve their goals.

2. Positive role of earnings management

The disclosure of accounting information is one of the tools for corporate managers to pass internal information to the outside. Compared with external information users, the company's management has more internal information about the company's future profitability. For favorable internal information, the company's management is willing to pass it to shareholders.At this time, they will actively adopt earnings management behaviors and adjust Surplus to transmit useful value signals to shareholders, so that accounting surplus information can better reflect the company's market value.

On the other hand, due to the uncertainty of the operating environment facing enterprises, the contract between shareholders and managers is always incomplete and rigid. The effective contract theory holds that the managers of an enterprise can flexibly face the incompleteness and rigidity of the contract through earnings management. Reduce contract costs and increase the market value of enterprises.

Approach to earnings management

Earnings management is mainly an accounting act, but its means are not limited to accounting methods. To sum up, there are six types:

1. Take advantage of changes in accounting policies. Changes in accounting policies are the most common and primitive method of earnings management. Generally speaking, because enterprises and the economic environment they face are different, for some businesses, accounting standards have given business managers a certain degree of flexibility (such as the choice of inventory valuation methods). In addition, China's accounting standards do not set too high a "threshold" for the "re-selection" of corporate policies, allowing companies to obtain additional benefits. This high-yield, low-cost mechanism drives companies to change accounting policies at will.

2. Management of accrued items. The current accounting is based on the accrual basis theory.Although the problem of the ratio of revenue and expenses is better solved, a lot of pending items and accrued items have been generated.Enterprises can increase revenue by confirming revenue in advance and deferring confirmation of expenses. Profit, and vice versa. With the increasing uncertainty of the operating environment of modern enterprises, the recognition of accrued items will have greater flexibility, thereby providing a wider space for earnings management.

3. Use the confirmation of the timing of the transaction. An enterprise can increase its current surplus by recognizing operating income in advance and postponing the recognition of expenses for the current period; on the contrary, postponing the recognition of income and recognizing expenses in advance to reduce the current surplus. Manipulating profits by changing transaction time and creating transactions is a non-accounting method of earnings management, which is favored by corporate managers, and new and more effective methods are constantly emerging.

4. Take advantage of related party transactions. Because of the control relationship between related parties, they often do not trade at fair prices, which brings room for earnings management for accounting. Enterprises and related parties use higher or lower than normal transaction prices for transactions to achieve the purpose of increasing or reducing corporate income. Most of China's listed companies are restructured from state-owned enterprises, or a part of the company is extracted and reformed.Therefore, listed companies have inextricable and interdependent relationships with their parent companies or subsidiaries, coupled with scarcity of resources Many listed companies use related party transactions to regulate profits.

5. Use asset reorganization to achieve the purpose of beautifying statements. In order to "beautify" the performance of the current period, the enterprise may conduct some one-off business with a surplus. The one-off write-off is to recognize losses and expenses as much as possible in the current period to the extent permitted by accounting policies, in order to achieve higher accounting profits in subsequent years. For example, according to China's securities law, a company's losses for three consecutive years will suspend or suspend its listing qualifications. Listed companies may, subject to accounting regulations and policies, allow them to take a huge amount of write-offs in a certain year, and then make a profit management strategy in subsequent years.

6. Fictitious transactions or inflated assets. For example, at the end of the year, fictitious sales and return transactions did not occur, using assets to evaluate falsely increased assets, etc.

Impact of earnings management

To have a correct understanding of earnings management, we must scientifically evaluate it and clarify a boundary. There is a difference between earnings management and accounting fraud: the former is within the scope permitted by accounting standards and accounting systems, and the latter is beyond the scope of standards and systems. Range. Therefore, earnings management is a neutral concept. Mastering the skills of earnings management is a reflection of the level of financial managers. Accounting fraud is a derogatory concept. The use of accounting fraud is a reflection of the moral corruption of financial managers.

As mentioned above, to some extent, earnings management has its positive effects: First, according to the contract theory, under the condition of "hard constraints" on earnings, and giving managers a certain amount of surplus under uncertain conditions in the future Management space can reduce contract costs, and also enable managers to respond quickly to expectations or emergencies, further motivating their innovation capabilities, thereby better overcoming incompleteness and fixedness of contracts, and protecting corporate managers themselves Second, because managers have a large amount of internal information, it is costly to pass these complex and professional information to investors in the form of reports, and earnings management can be achieved through "profit equalization". Passing internal information that enterprises could not pass, which helps reduce the impact of fierce fluctuations in the capital market on investor decision-making behavior.

Although earnings management has the above-mentioned positive effects, if the accounting method of earnings management is used extensively, it will also bring some adverse effects: First, the reliability of financial statement information is reduced, and accounting information needs to be carried out in accordance with its management objectives. "Processing, transformation" makes the reflected corporate performance disconnected from the actual business operations. Earnings management makes the profit information on the report into a digital game, thereby making the reliability of the entire financial report questionable. Loss of usefulness; secondly, there is a certain risk to the development of the enterprise. Although earnings management can protect the interests of managers and even the enterprise to a certain extent, if the earnings management behavior has not been constrained and monitored, it will form a kind of The bad behavior formula, that is, the use of earnings management instead of innovative efforts to obtain high profits and greatly harm the interests of capital providers, if this phenomenon spreads and becomes the norm in society, it will lead to capital markets and lending markets Failure not only makes it difficult for managers to achieve the goals they expect, but also affects the reputation and image of the company, Subsequent development caused adverse effects; finally, because earnings management is mainly driven by the economic interests of managers, and its economic interests are inconsistent with the interests of investors, creditors and the state, in many cases, earnings management will hurt investment The interests of investors, creditors and the state.

Governance countermeasures for earnings management

For earnings management, complete elimination is not possible, and moderate earnings management is a sign that an enterprise is constantly maturing, indicating that the relevant stakeholders of the enterprise will take legal measures to pursue the realization of their own interests, which has a certain positive effect, so the government In the management of corporate earnings management behaviors, relevant policies, regulations, and contracts should be constantly improved, rather than blindly cracked down and suppressed.

1. Establish and improve a high-quality accounting standards system. Earnings management often occurs when accounting standards are not clearly specified or ambiguous. Existing accounting standards allow too many choices, the relevant regulations are not specific and clear, and they lack operability, which provides an opportunity for management to operate the surplus. The reason why China's accounting information is seriously distorted is that, in addition to institutional reasons, the lack of a set of sound accounting standards is an important factor. Therefore, it is necessary to further revise and improve the accounting standards in accordance with international practices, minimize the accounting procedures and methods available in the accounting standards, and reduce the scope of accounting policies.At the same time, with the development of the economy and the emergence of new problems, such as some non- The disclosure of financial information requires timely amendment and continuous improvement of accounting standards.

2. Strengthen audit and improve audit quality. Auditing is an important part of the quality assurance system of accounting information. Auditing can increase the credibility of accounting information and reduce false accounting information. But unfortunately, the existing CPA audit is far from playing its due role. For various private benefits, CPAs often succumb to the intent of the audited unit, lose their independence, and even audit collusion. The author believes that to make audit truly a "gatekeeper" of the market economy, first of all, it is necessary to strengthen the construction of audit standards and establish a set of standard systems that can effectively regulate the audit business; secondly, to improve the quality of certified public accountants, including business quality and professional ethics quality Third, we must strengthen the independence of auditing and truly achieve economic, work, and spiritual independence. At the same time, the audit profession, the securities supervision department, and the financial department should increase the punishment for audit fraud and severely punish fraud.

3. Reform existing regulations on listing, rights issue and suspension of trading. At present, the conditions for the rights issue are only the return on net assets in the last three years has been above 10% per year. Due to the single indicator and the rights issue, it is beneficial to the listed company, so listed companies often use asymmetry of accounting information and incompleteness of the contract. To manipulate profits in order to obtain rights to share options. Relevant empirical research also shows that listed companies conduct earnings management in order to obtain rights issues. Similarly, the delisting condition is "three consecutive years of loss", so that some companies may first apportion multiple transfer expenses through earnings management to prepare for the "return loss" in the third year to avoid delisting. In order to prevent the company from being controlled by the securities supervision department for three consecutive years of losses, loss-making companies often use accrued profit item management to increase or decrease revenue in the year of loss and before and after years. In this regard, a set of indicator systems should be established to avoid the easy manipulation of profits by management authorities due to the unity of indicators.

4. Improve the theoretical level of accountants. To improve the level of accounting theory in our country, it is important to understand the economic consequences and economic effects of certain accounting theories in a specific environment, and to be able to distinguish the boundary between earnings management and accounting fraud. Accountants should strengthen their study of accounting theory, especially the basic accounting conceptual framework, and truly provide the company's external information users with relevant and reliable accounting information.

5. Reform the current enterprise performance appraisal system and manager compensation and appointment system. The current performance evaluation of enterprises often pays too much attention to profit indicators, and profits are calculated according to accrual basis, which is prone to accrual project management. Therefore, a set of effective long-term and short-term performance evaluation index system should be established, and economic value added and cash flow from operating activities can be used as core indicators. Regarding the appointment system of cadres, we should pay attention to multi-faceted assessments, and strengthen auditing before appointment and before leaving, to prevent the occurrence of the unfavorable phenomenon of "official figures, digital figures of officials". At present, the remuneration of state-owned enterprises is not connected with the value of the enterprise. In order to obtain remuneration, managers often do not consider the requirements of long-term development of the enterprise, and make decisions that can increase the current earnings of the enterprise but do not help increase shareholder wealth. At the same time, profit manipulation is prone to occur. In this regard, we should reform the compensation system with fixed wages as the main body, increase the proportion of risk income, and link the manager's compensation with the performance of the enterprise. In particular, incentives such as performance shares, manager stock options, and value-added rights can be used. Coordinating the conflicts of interest between managers and shareholders can also reduce manager's profit manipulation to a certain extent.

6. Improve corporate governance structure. The so-called corporate governance structure refers to a system arrangement based on contractual relationships between various parties that affect corporate management behavior. It includes the external governance structure formed by competition, such as capital market, manager market, merger market, etc., and the internal governance structure composed of shareholders' meeting, board of directors, board of supervisors, and managers. From the outside, China has not yet established a fully developed and standardized operation of the stock market, the manager market has not yet formed; from the inside, state-owned enterprises have the phenomenon of owner absence, and the country as the ultimate owner of assets is independent of the outside of the enterprise. The mechanism of mutual checks and balances of various institutions stipulated in the Company Law is also far from functioning. The board of directors and the board of supervisors are largely ineffective. The phenomenon of leading insiders is serious. The manager controls the accounting information system. Consider, often have to obey the manager, manipulate financial reports, provide false information. Therefore, to prevent the overflow of earnings management, the corporate governance structure must be improved. The board of directors should be improved, and independent directors should be introduced into the board of directors; the establishment of an audit committee responsible for auditing and supervising the company's operating and financial activities, and the appointment and exchange of CPAs; the establishment of a contract-based power of attorney between the board of directors and management to provide for the Responsibility relationship. At the same time, vigorously develop the capital market and cultivate the manager's market, so that both the internal monitoring mechanism and the external monitoring mechanism can give full play to the role of effective supervision of the financial reporting behavior of managers.

references:

[1] Wei Minghai. Review of basic theory and research of earnings management.

[2] Chen Hua. On earnings management.

[3] Zhang Hong. Thinking and analysis of earnings management and profit manipulation.

[4] Paul M. Healyand James M. Wahlen. Review of earnings management research and its inspiration to the construction of accounting standards.

[5] Jia Jianfeng, Li Shuhua. Differences between earnings management and profit manipulation.

[6] Wang Jing, Tao Xiaomin. Negative effects of listed company earnings management and countermeasures. [7] Zhang Ming, Liu Hua. Rational thinking on earnings management.

Author: Sun Hongmei Source: Shandong Business Accounting 200601