Are Earning Management Practices as Took Place at C&S and Eti Smart? Are They Ethical? Are They Legal?

Are earning management practices as took place at C&S and ETI smart? Are they ethical? Are they legal?

Any action that changes reported earnings (or any other income statement or balance sheet item) while providing no real economics income to the organization and, sometimes, actually causing harm is counted as earnings management, a widespread form of manipulation (Merchant and Van der Stede, 2012). Cook and Spector, Inc. (C&S) and Eastern Technologies, Inc. (ETI) are two companies that face with earning management issues. This essay will examine earning managements which took place in both companies in respects of intelligence, ethics and law compliance.

C&S managed earning by creating several type of reserve in the account to save the profit of current period to use in the needed future in 1985, and the company free up the reserve to report increase in profit and development expenditure in 1986. While, ETI boosted its earning by adopting aggressive accounting methods, for example, capitalizing all repairs and maintenance, capitalizing interest as deemed to be the cost of financing the construction in progress, and classifying many expenditure as related to acquisition to add to goodwill for being amortized over 40 years (Merchant and Van der Stede, 2012). The smartness of these two practices can be evaluated depending on short-term and long-term perspective.

For short-term aspect, we can see that there are many stakeholders gain benefit from these earning games. For examples, companies report high profit and good performance, outperforming their competitors, and at the same time, management and employees get rewarded. These earning management decisions made by top management may seem to be the smart choice. However, we cannot ignore the fact that all these benefits and advantages are created from distortion of real number in accounting systems and financial reports. In the long-run period, when these malpractices are revealed, all stakeholders,...