Healy and Wahlen State That One Type of Earnings Management

question 53

Essay

Healy and Wahlen state that one type of earnings management occurs when managers use judgement in financial reporting to alter financial reports in order to mislead some stakeholder about the economic performance of the company.Earnings management is a consequence of a judgement by management which results in lower economic information content of the financial reports.
Discuss four reasons that discourage managers from practicing earnings management.

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Definitions:

Owner's Equity

The residual interest in the assets of a company after subtracting liabilities, often referred to as shareholder's equity in a corporation.

Liabilities

Financial obligations or debts that a company or individual owes to others.

Asset

A resource with economic value that an individual, corporation, or country owns or controls with the expectation that it will provide future benefit.

General Ledger

A record of all financial transactions divided into accounts and usually compiled at the end of each month.