About the Book

Earnings management by companies has long been documented in the academic literature. The scale of the problem came under the spotlight, with major scandals around the world, shaking investors' faith in published company accounts. CEOs and other top executives have been found to manage their earnings aggressively, not only through accounting sleight-of-hand but also by skewing corporate policies in the hope of improving their company's apparent performance. In many cases, earnings management was driven by the desire to prop the company's stock price, often the key basis for executive compensation. Earnings management is the intentional misstatement of earnings leading to bottom line numbers that would have been different in the absence of any manipulation. Earnings management does not necessarily mean upward manipulation of earnings, but it includes downward manipulation as well.

Earnings management in the present competitive world is an economic reality. In the words of Ralph Ward, "It is easier to hide voodoo numbers under headings that are already fuzzy". The regulators are now increasingly cracking down hard on companies indulging in earnings management and questioning the efficacy of even those accounting standards that were quite acceptable till a few years ago. The borrower firms, in particular, are still comfortable and not helpless in market that supports them more than the lenders. So, what are the options before stakeholders who have always attached extraordinary importance to and relied excessively on financial statements which are now posing new challenges to them. Think of the plight of a common man (shareholder)!

Users of financial statements are often forced to wrestle with dramatic differences in reporting practices between companies within the same industries; asymmetry of information abounds. Intangibles, such as the credibility or reputation of corporate management, must be considered when analyzing a company. Discretionary choices in financial reporting that can ultimately lead to, or create; future earnings that drive stock prices must be identified and adjusted for. As a result, financial statements users must develop a keen understanding of the fundamentals underlying each firm's business operations.

While the regulatory bodies, viz. SEC and SEBI have been expressing concern over the issue and their comments to investigate earnings manipulation have sparked renewed interest in the area, there has been little contribution in the academic and professional literature on the detection of earnings manipulation, particularly in India.

This book is based on a study that aims to unfold designed earnings practices in the Indian corporate enterprises for the period 2003-04 to 2007-08. It contributes to the literature by increasing the knowledge as to where and when earnings management is likely to occur. It tries to assist investors and creditors in making investing and lending decisions by making them aware not only of the reliability (or truthfulness) of financial statements, but also to the relevance and predictive value of information presented in financial statements.

Answers to issues and questions raised in the above discussion can help standard setters assess the effects of accounting standards that require management judgment. It would ultimately lead to less erosion of shareholders' value in particular and economy resources in general. So, an insight into earnings management is essential for all the market participants to extract the best use of financial statements. In some sense, the onus lies on academia and financial practitioners to focus on the importance of understanding a firm's accounting practices.