Financial Transparency and Earning Management Essay
In every business setup, the aspect of reporting financial results in an adequate manner is one of the management aspects of a firm. In all cases such report should be based on standard financial requirements where accuracy and validity should highly be monitored. Business finance includes both costs and revenues. The health of the business is determined by the strength of these two components. However, there has been indifference in the understanding between the current period studies and the prior studies on the understanding of the relationship between transparency in reporting and management of earnings.
Formerly, greater transparency has been viewed as a contributor to developing earnings management. However, in the current period greater transparency in cases of firms with big incomes will reduce their chances of earning management if the firm engages in such great transparencies. (Hunton, Libby, Mazza, 2006) Following the results got from their financial report in relation to their transparency, firms will regulate their financial strengths through varied ways. Where a firm has fewer earnings than expected, it will sell its securities to achieve such an income deficit and the opposite is true for firms with high income.
For huge financial reporting however, transparency is geared towards the
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In his research, he has realized that, transparency in reporting enables the users to visualize high standards of management of earning. However, this has been results based on the former research studies. Contrast to the current, research findings, users of financial results are less satisfied by complicated financial reports in which managers may have used difficult and complicated financial entries to report these results(Hunton, Libby, Mazza, 2006).
In many of the companies investigated, it is revealed that there is less detection of earnings management when all the information have been adequately discussed in full and in a less transparent financial statements of the equity reports to the stockholders. In many of the companies with stocks of available-for-sale, the use of less transparent reporting methods has seen as the most favorable way to achieve earning managements to the stockholders. (Hunton, Libby, Mazza, 2006).
In a research which the author entered into showed that many managers will involve in less transparent reports in which case this has been seen to favor firms wishing to trade on their available-for-sale stock in creating income for their investments. With use of highly transparent financial reports, this will reduce the involvement to the managers in focusing on earning management. To foster these highly transparent reports, the author has found that this can be more attributed through use of more methods to ensure its achievement. (Mazza, Porco, 2004)
However, to highly ensure management of earning in available-for-sale stocks, the current research has revealed that, managers should attempt to use comprehensive income reporting styles which will adequately produce the results of the possible gains or losses of the firm in its reported earnings. This is because, the available-for-sale stocks of securities are usually given as a report in fair value of the balance sheet in which case report involves unrealized gains from the holding and any possible gains that may be realized in trading with these securities.
This use of comprehensive income should be focused since in all cases, income reports should never be manipulated but given in their actual view. However, earnings may be manipulated by the mangers to ensure they achieve their targets in convincing their stockholders. (Hunton, Libby, Mazza, 2006) Having used comprehensive report, the firms can merely apply strategic timing to achieve management in the earnings which involves proper timing of how the firm realizes its gains and losses which may have accrued to the investment securities.
Rather than relying on the transparent reports, the authors study has thus revealed that, most of the stockholders would actively time on the possible periods which the firm recognizes its realized gains or even possible losses in its investments. (Mazza, Porco, 2000) His research has revealed that, use of comprehensive income reporting methods enables the client easily extract the relevant information on the gains and the losses which would effect their equity.
However, in the view to deal with the comprehensive income reporting, the use of performance statements would highly enhance a visibility in the investors view regarding the firms finance reports and would thus increase the investor’s use of whatever information may be contained in the performance statements. This research has revealed that, the use of this performance statement is a mere simplicity of the comprehensive report in which case, use of this statement would simplify the investors attempt in understanding the comprehensive reports.
Different forms of performance statements can be used by firms to elaborate their comprehensive financial statements, depending on what they have in the reports. (Hunton, Libby, Mazza, 2006) Conclusions The use of comprehensive financial reports can adequately be of a high implication benefits to investor than more transparent statement. Though the former research revealed that use of transparent reports would enable investors to understand the realizable gains and also losses of the firm they would like to invest in, the author’s research has however revealed the benefits which may accrue to a firm in use of comprehensive reports.
In which case, clients will better understand the financial health of the firm through the comprehensive reports more than highly transparent ones. Contradiction of research and study topic: Although the topic was geared towards revealing what transparency in reporting may affect the management of the earning as the result of the earlier studies, this research is a contradiction to the study topic. In its findings, transparency in reporting does not necessarily attribute to earning management. This is in the view by managers that financial reports should never be manipulated in attempt to meets that firms investment goals.
However in the finding of this research, comprehensive report would be more influential to the clients especially when accompanied by performance statement. In its view, clients are more interested in comprehensive reports than transparent cases. Reference: Mazza, C and Porco. , B (2004) An assessment of the transparency of Comprehensive income reporting practices of US companies. Working paper: Fordham University. Hunton, J. , Libby. , R & Mazza. , C (2006) Financial Reporting Transparency and Earning Management.