Business and Different Financial Issues

Category: Business
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Corporate managers have a professional responsibility to ensure the integrity and faithful representation of their company’s financial statements. Outside auditors are responsible for expressing an independent opinion on financial statements to determine if they are presented fairly and in accordance with GAAP. These professional roles are the cornerstone of the U.S. financial system that protects public interest and investors confidence. However, over the past 50 years, the pressure on corporate management to meet analysts’ short-term earning projections, showing continued growth, has increased dramatically. The markets have punished companies harshly for missing earnings projections, even by a small amount. This pressure led to the management practice called “earnings management and “earnings smoothing that had an adverse effect on the quality of earnings and financial statements. SEC Chairman Arthur Levitt described this process as a “game among market participants (The Numbers Game, pg. 1). The integrity of financial statements was no longer a priority for corporate management. They were willing to take risks and push the limits on the accounting rules in order to show their desired financial results. Auditors also contributed to this problem by not standing up to their clients who were implementing the questionable accounting practices and misrepresenting their financial statements. The standard setters, regulators and politicians were pressured and lobbied by industries not to impose stricter standards on corporations. As a result of these developments there were a series of financial collapses and accounting scandals in the U.S. such as Enron, Sunbeam, Waste Management and Arthur Andersen – billions of investment dollars were lost.

One reason behind the “earnings management mindset is that top management had personal financial incentives to increase the market value of the companies stocks. Managers’ compensation packages included thousands and sometimes millions of stock options. In order to increase the value of their stock options top management had to meet or exceed analysts’ earnings expectations for their companies. Therefore, personal greed and market pressures caused management to adopt aggressive accounting practices and techniques to help them craft the preferred short-term financial results. Accounting principles provide managers with flexibility to use their judgment, which also creates an opportunity for misuse and abuse in application of the accounting standards. Corporate management was using five popular management earnings techniques: “big bath restructuring charges, creative acquisition accounting, “cookie jar reserve, materiality and revenue recognition. For example, Sunbeam CEO, Mr. Dunlap, recorded an excessive restructuring write-off and created “cookie jar reserves in the year of 1996 when he became CEO. This technique made the following year’s results look better and created an illusion of the company’s turnaround. Sunbeam also improperly recognized millions of dollars of sales revenue for paper transactions through the “channel stuffing technique. Waste Management Company manipulated the depreciation expense numbers to overstate their earnings.

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The priority on short-term financial gains above long-term results by companies` managers caused many companies financial devastation and even total collapse. Corporate managers were misrepresenting the real financial picture and misleading investors. Eventually, investors lost confidence in capital markets and the entire financial system was in jeopardy. The integrity, credibility and transparency of financial statements and focus on the long-term financial goals should be a top priority for managers. The whole financial community is responsible for restoring the financial stability and success in the United States. The auditors should maintain independence and follow the professional and ethical standards. The private standard setters must continue to improve accounting standards and regulators must reinforce standards implementation.

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Business and Different Financial Issues. (2020, May 11). Retrieved from