Advanced Financial Reporting & Regulation Assignment

Advanced Financial Reporting & Regulation - Assignment ExampleThe present look for has identified that according to the SEC, the BMS company also engaged in cookie stupor accounting. That is, it created phony reserves for disposals of unneeded plants and divisions during high-profit quarters. These would be carried to decrease the operating expenses in results of the quarters where BMS income or loot figures are insufficient to meet the forecasted amounts. Required a. Using relevant academic papers, discuss the incentives why managers would resort to extreme earnings steering technique such as this. b. Critically evaluate the effectiveness of stuffing the channels and cookie jar accounting as earnings management devices. Earnings management is any legal activity via which the entity administers its profits earned, retained and distributed and thereafter carries out its financial reporting, making decisions regarding the contents, details, and disclosures to be provided in the del iverables to give a true and fair view of its operations. According to Lev, earnings play a very important role not only because they shape up the success of any business but also because they can have drastic effects if the managements reporting of earnings get manipulated. Therefore, it is of utmost signification for all key personnel of the entity to excel at earnings management, taking into account that it doesnt involve any manipulative measures and fraudulent practices. According to scenario addicted in the question, the pharmaceutical company mentioned was similarly involved in maneuvering its books of accounts by using tactics such as stuffing the channels and cookie jar accounting, resulting into non-compliances, being penalized for the same. The question here arises as to why would managers of this enterprise be engaged in such practices of window-dressing the companys books of accounts though aware of its unseemly consequences of non-compliance? Following are given few incentives which may urge managers to be indulged in wrongful earnings management Fulfilling Expectations of Capital Markets The most common agent for a majority of the times in such instances is motivation to satisfy capital markets. Managers are mostly under extreme pressures to create value for existing and prospective shareholders and when they find no way to do so in real terms, they end up manipulating reporting of earnings thereby affecting favourably stocks market price in the short run.