The Reasons Why Firms Want to Use Earning Management

Good afternoon everyone, today we are going to continue to talk about the consequence of Earning Management, I am xxx We will present the bad side of earning management through 2 cases, The first one is Enron: what happened and what we can learn from it and the second one is the ethical dilemma at Northlake. Both cases are present how management is motived to manipulate accounting numbers to achieve their specific purpose, for example in the first case, Enron increased their net income through many methods to rise their share price, but in the second case, the company decreased their net income.
However, both earning management comes with the bad consequences happened to the society. Next, we are going to see another example which is how management is motived to manipulate accounting number to reduce or underprovide for environment and restoration costs. As a result, there cause some ethical issue. First let us go through the Background information: (A. F. P. Company). It is in the Pulp and Paper industry. The company had three major mills, located in some of the more remote location in the province. From A. F. P.
Company’s standpoint, of course they do not want to expend too much money on the discharge of waste water from pulp and paper mills; furthermore, the firm had been facing difficult financial times due to recession, and this had caused substantial hardship in the three small communities where the mills were located. But, as in the Pulp and Paper industry has the responsibility to the new government proposals to put effluent controls on the discharge of waste water from Paper mills in environmentally sensitive regions of the province. Therefore, the managers in the (A.

F. P. Company) find a way to give themselves a reasonable reason not to install the cleaning equipment. CEO and V. P. of A. F. P. collude together to use earning management to increase their cost on the financial analysis. in the financial report, they states that “we will have severe financial problems if we are forced into building a lagoon for waste water treatment”, in order to show their fake severe financial problem going to happen, they highly estimate their operating cost would rise 30%, but in fact their cost only can be rise around 8%-10%).
And they also highly estimated all other costs. In addition, they don’t take into account the damage to the local river at all. The people live in the downstream are still drinking the garbage or damaged water In this case, let us put all the legal issues behind, and focus on the ethical issue first. As the case mentioned the down totally dependent on the mill for economic survival. It is kind of like Blackberry in Waterloo.
As the mills goes, so goes the town. And will thousands of people lost their jobs, if put you in the position to decide between the economic survival or environment damage, how will you decide? If you in the position of A. P. F’s accountant how do you decide between your personal benefits and code of professional code? Let’s say, if you do not use earning management to increase the cost, you will force to lose your job by the CEO.

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