Both FASB and AASB have developed the principle based accounting standard, where, the studies have argued that the principle based accounting standard impacts earning management negatively in terms of reduction in its practices (Van Beest, 2009).
The study has argued that the flexibility in the standards of accounting reporting from the standard setters can lead to achieve the earning management. The accounting standards and their elaboration discourage the use of various methods of accounting for earning management (Babalyan, 2004).
The findings above show that the standard setters and regulators can impact on the earning management as they require more principle based reporting of finance, and therefore, the changes in their principles can de-motivate or motivate the earning management.
Ethics of earning management:
The ethics of earning management practices are very important as the practices impact the human relationship such as frauds, abuses of accounting data and scandals of financial issues that were resulted in distrust among the individuals in the past. Different scholars, field experts and the researchers have different views and outcomes about the ethics of earning management (Vladu, Amat & Cuzdriorean, 2014).
Unevenness among the management of earnings and the users of accounting information is the major concern in the ethical problems of earning management. The study has criticised that the pressures on the management of developing periodical incomes and earnings lead the earning managers to develop misstatements that raises the questions for ethical considerations (Elias, 2002).
The debate and arguments about ethics of earning management show that the earning management ethics are disagreeable concept that has been argued about the practices of management either qualitative or in line with the interest of the company, investors and shareholders.
Slide 2:
Despite of earning management ethics, another argumentative concern in earning management is the quality of earnings. It has been argued that for shareholders and investors, it is not just enough to know about the income, but they are also concern about the income quality that means from where the income is being generated (Rankin et al., 2012).
Some use earning quality to means the choices of management of earning over the period of time such as the insurance companies estimate the wide range of earnings based on fuzzy statements such as how much company will earn based on the life of the person and therefore, the earnings of insurance companies are considered as low quality. Like this concept of earning quality, there are multiple other concepts of low and high quality earning (L. Weil, 2010).
The arguments above show that earning quality is also directly related to the interest of the management and the investors in the capital market. For instance, if a shareholder considers high profitability over the period of time as important, it will be major concern of its quality, where, another if concern with the source of the income, it will less prioritize the high profitability over the source, where, some factors can impact on the earnings regarding quality such as earning reporting, earning management and value relevancy.
