The picture of how well a firm has performed can be derived from the evaluation of information contained in accounting reports of the firm. Managers, therefore, owe it a duty to the various stakeholders especially, investors to prepare accounting reports that express the true and fair view of the business transactions for the period specified. According to the BPP Learning Media (2012), financial reports represent economic phenomena in words and numbers that must faithfully represent relevant phenomena that it purports to represent.
Sometimes, however, when businesses are doing badly managers are tempted to use accounting techniques to enhance the apparent performance of the firm in an unjustified way (Jones & Jones 2011). Managers exploit flexibility in accounting rules which allows them to determine the direction of accounting reports by adopting accounting policies that serve the interest of management. This is one of the reasons why different accounting information can be generated from the same business data when the accounting numbers are manipulated.
The manipulation of accounting information to achieve a desired purpose is earnings management.
Jawad and Xia (2015) described earnings management as a form of creative accounting. Earnings management involves taking deceptive steps to present financial statements that suits or protects management interests. According to Akhgar (2012), earnings management is the practice of using tricks to misrepresent or reduce transparency of the financial reports. Assessment of a firm’s financial performance will be distorted when accounting information contained in the accounting reports is not a true reflection of the business transactions it purports to represent when firms engage in earnings management.
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