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Earnings Management Essay

Socially Responsible Investing or Socially Responsible Investment or the SRI is based on the viewpoint of investments that are to be supported by monetary, societal and ecological criteria. The SRI investors invest in businesses that exhibit values. They people who Socially Responsible Investment try to keep away their investments from the organizations that are not environmentally friendly.

Some of the names of the evaluation agencies that offer research and rating of the CR performance of companies are Ceres (USA), GES Investment Services (Sweden), EIRIS (UK), Institute for Strategic Research (Hungary), KLD Research & Analystics. Inc. , Sustainable Asset Management (Switzerland), Avanzi SRI Research (Italy), Scoris (Germany), Vigeo (France) and many more.

The terms of finance given to any organization mostly for the social benefit of the society is called philanthropy and is considered by some as giving back to society.

This can either be in form of grants or loans with a primary intention of creating social value and not for any kind of a personal gain.  This can be either commercial or an individual giving or it can be both e.g. employees made to contribute for a social cause. This comes under the caption of corporate matching. However, in the case of corporate philanthropy, people or organizations can directly contribute for the social causes and is referred as cause related marketing.

Nowadays, lots of financial frauds and failures are occurring, therefore, it is the duty of the accountants to emphasis on issues related to earnings management and earnings quality.

The earnings of a business are managed in many ways. Different businesses have different ways of how to manage their earnings. They can either be moral or immoral and unethical as well. When the management does not try to control its earnings, they can see a positive effect on their earnings. The earnings data is more reliable because management is not controlling the earnings by changing accounting methods, recognizing one-time items, or deferring expenses or accelerating revenues to bring about desired short-term earnings results.

However, if the earnings management is not present, high quality earnings are not assured. All the earnings of the business cannot be stated in its financial statements; therefore, this theory is linked to the idea of earnings quality. This term, earnings management is known in order to control the earnings that are reported and this is done by using some defined accounting methods.

Nowadays, there is a high demand of the assurance of the worth of the earnings that a business earns and this is the measure of the ability of the earnings that have been reported and also highlights the true earnings of the business. It also forecasts the future earnings of the company that is expected by the managers.

There was a complete change in the perception of the people when they found out that they had overlooked the decision making process at WorldCom and Enron to be ethical. But infact, this was not the case. WorldCom and Enron were practicing unethical things. The stakeholders became concerned and demanded for a new financial report along with evidence supporting those statements. It is really hard to restore the confidence of the stakeholders once things have been shattered and same was the case with them.

Soon after the death of Anderson, the fall of Enron was visible. This shook America and the stakeholders of Enron seemed to be very much concerned when it was revealed that the business has been practicing unethical practices.

In 1980s, Sundstrand who was a defense contractor was sued $ 227 million for his unethical behavior. This led to a fall in his stock to about 25% and its image got shattered. The stakeholders were aggravated and so to avoid such reaction, it’s always better for businesses to take care about the practices they are into, before hand.

Everyone prefers to deal with businesses that are indulged in ethical practices and work for the safety of the environment and the society. All the stakeholders be it their customers, investors or the suppliers have the same opinion about it and it is the duty of the business managers to take of the activities that are being carried. This also helps the business to achieve goodwill in the world.

In the 1960’s and the 1970’s the people became more aware about the results of the trends of the growth of the businesses. Legitimacy theory was also introduced in this era.

After the real face of Enron and WorldCom was seen by the public, not just their legitimacy was challenged but the auditors of the company were questioned as well. Although the public was more furious on Anderson as it was connected to the two but even the auditors had to give their justifications.

The government also played an important role in defining the laws related to the ethics that a business should ensure. Legislations have been passed by the governments regarding the unethical practices that can be adopted by some of the businesses or else they would be forced to close down or they can be sued with a very heavy fine.[1]

The firms that are involved in providing with the auditing services to the business have also specified their goals. Price Waterhouse merged with Cooper & Lybrand and both declared that their specializations were complementary. However the merger between KPMG and Ernst & Young was called off as it was declared to be mismatched[2].

Some of the unethical practices that can be adopted by a business are forging another’s name or initials, reporting results without actually analyzing the associated samples , signing for review of data when such review was not completed, knowingly altering data entries without acceptable justification, any action to “cover up” an occurrence from which loss of data and/or revenue can occur, substituting previously analyzed QC samples , spiking a “little extra” to improve recoveries, not reporting known instances of improper practices ,manufacturing and/or distributing controlled substances on DCL property , fabrication or falsification of records or data, improper Peak Integrations, improper Clock Setting (Time Traveling) or improper Date/Time Recording,

Improper GC/MS Tuning, discarding points in the initial calibration ,  Performing multiple (more than two) calibrations or QC runs, using the incorrect (previous) initial calibration, improper Alteration of Analytical Conditions, discarding points from a MDL study without use of established procedures and required documentation, misrepresentation of QC Samples and Spikes, adding surrogates after sample extraction,        reporting post-digested spikes or duplicates as pre-digested spikes or duplicates[3].

Some of the examples of immoral practices that businesses can use while marketing can be lack of clarity in pricing, selling at a loss to increase market share and destroy competition in order to subsequently raise prices i.e. dumping, price fixing cartels, encouraging people to claim prizes when they phoning premium rate numbers , adopting “Bait and switch” selling by attracting customers and then subjecting them to high pressure selling techniques to switch to an more expensive alternative, high pressure selling – especially in relation to groups such as the elderly, counterfeit goods and brand piracy, copying the style of packaging in an attempt to mislead consumers, deceptive advertising, irresponsible issue of credit cards and the irresponsible raising of credit limits and unethical practices in market research and competitor intelligence[4]

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Some of the examples of immoral practices that the businesses can use concerning their products are selling goods abroad which are banned at home, omitting to provide information on side effects, unsafe products, built in obsolescence, wasteful and unnecessary packaging, deception on size and content, inaccurate and incomplete testing of products and treatment of animals in product testing[5].

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