Earnings management is the method of accounting that helps to create manipulated picture of the company’s internal activities, overall performance, and financial position. However, the methods of the earning management are inefficient since they fail to distinguish the acceptable practices from fraud (Ronen & Yaari, 2008).
Although China is moving towards internalizing of its auditing and accounting standards, there are still some loopholes that companies take advantage of to manipulate their reported financials. Earnings management in China commonly takes place when the issue of securities arises or when the company faces any trouble of being removed from the list. Many firms in China use their non-core income in the earning management to meet their objectives. However, past experiences have revealed that non-core income can be detected easily. Therefore, the researchers are emphasizing on the other means of earning management. Accrual based models are one of that technique of the earning management that will eventually restrict the probability of manipulation in the company’s report.
It is also observed that the earning management in the listed firms of China is uncontrolled. The main reason behind this fact is the lack of worthy knowledge among the regulators and investors of China. For Instance, the China Securities Regulatory Commission (CSRC) has made it compulsory for all the listed firms within China to meet the specific return on equity (ROE) before the request for issuing additional shares to the current shareholders. Also, the CSRC holds the right to delist the enlisted companies of China in the case of reported net loss for the continuous three years. Those regulations that are based on the accounting numbers could easily be manipulated by the managers of the firm to save their companies from being delisted or for their vested interests. (Liu & Lu, 2004).
References
Liu, Q., & Lu, Z. (. (2004). Earnings Management to Tunnel: Evidence from China’s Listed Companies. Hong Kong.
Ronen, J., & Yaari, V. (2008). Earnings Management: Emerging Insights in Theory, Practice, and Research. Berlin: Springer Science & Business Media.
