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1、EarningsManagementandEarningsQuality1.WhatisEarningsManagement?(BryanHall’sWebpage)Earningsmanagementisdefinedbyaccountingliteratureas “distortingtheapplicationofgenerallyacceptedaccountingprinciples.” ArthurLevitt,theoldSECChairman,definedearningsmanagementas“practicesb
2、ywhichearningsreportsreflectthedesiresofmanagementratherthantheunderlyingfinancialperformanceofthecompany.” Earningsmanagementisoftendefinedastheplannedtimingofrevenues,expenses,gainsandlossestosmoothoutbumpsinearnings.Inmostcases,earningsmanagementisusedtoincreaseincomei
3、nthecurrentyearattheexpenseofincomeinfutureyears.Forexample,companiesprematurelyrecognizesalesbeforetheyarecompleteinordertoboostearnings.Earningsmanagementcanalsobeusedtodecreasecurrentearningsinordertoincreaseincomeinthefuture.Theclassiccaseistheuseof"cookiejar"reserves
4、,whichareestablished,byusingunrealisticassumptionstoestimateliabilitiesforsuchitemsassalesreturns,loanlosses,andwarrantyreturns.Managersengageinincomesmoothingactivitiesbecausetheyknowthatvolatileearningsstreamstypicallyleadtolowermarketvaluations.Manysuccessfulmanagement
5、teamsbelievethatthestrategictimingofinvestments,sales,expenditures,andfinancingdecisionsisanimportantandnecessarystrategyformanagerscommittedtomaximizingshareholdervalue.Investorsaredissatisfiedwiththemanagementofearnings;however,investorsbecomeenragedwhenquarterlyorannua
6、learningsforecastarenotmetbyfirms. Therefore,investorsandthepublicviewminorearningsmanagementasacceptableandaneverydaybusinesspractice. Inresponsetopubliccomplaintsandconcernforearningsmanagement,theSEChasissuedbulletinstohelppreventearningsmanagement.2.ThePublicPercept
7、ionofEarningsManagementEarningsmanagementhasanegativeeffectonthequalityofearningsifitdistortstheinformationinawaythatitlessusefulforpredictingfuturecashflows.WithintheConceptualFramework,usefulinformationisbothrelevantandreliable.However,earningsmanagementreducesthereliab
8、ilityofincome,becausetheincomemeasureisbiased(upordown)and/orthereportedincomethatisnotrepresent
