Earnings management is a strategy in accounting that is useful for knowing the condition of the company and the company’s performance.
In addition, in general, this management strategy is used by company managers in intervening information from reporting company costs.
Whereas intervention is used as a basis for assessing earnings management as a form of fraud, but other parties do not consider intervention to be a form of fraud.
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This is because these intervention activities are still carried out using generally accepted accounting procedures and methods.
So, so that you get to know more about this management, let’s look at the full review below.
Definition of Profit Management
First, you need to know what earnings management means in the world of accounting.
This one accounting management is one of the accounting strategies that manages the company’s cash inflow/revenue and manages the company’s expenditures with the aim of profit management to ensure that the business being managed produces a net operating profit.
Usually, this one accounting strategy is closely related to the income statement or also known as the profit & loss (P&L) report.
You can make comparisons from these reports regarding what financial aspects can be done using this one management.
Thus, it can help you determine the amount of profit generated by your business.
On the other hand, this one accounting strategy is also important because it can develop business strategies and can help businesses to continue to survive and develop. So that will determine whether you will become a successful entrepreneur or not.
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So, company managers can identify what aspects need to be improved in the future.
For example, the company can determine whether the company’s spending is sufficient to carry out product development and research to compete with competitors?
Another example is that the company can also determine whether the expenses are too large or not, if so, then improvements can be made so that expenses become more efficient.
Profit Management Function
Besides you need to know the meaning of this one management, you also need to know the function of earnings management in accounting theory.
Knowing the functions of this one management strategy so that you understand more about what this one management is.
So, consider the following review to find out what is the function of this one management in the world of accounting.
1. Monitor Profit and Loss Reports
The first function is to be able to monitor the income statement in a company.
For companies that are just starting their business, it is very important to calculate their Break Even Point (BEP) .
The profit and loss report itself is available weekly, monthly, yearly, or quarterly depending on the policies of each company in using their company’s financial reporting software.
However, every accountant can make an income statement according to the requests and needs of the company’s management.
Therefore, earnings management is useful for monitoring this income statement. You can take advantage of this management to minimize losses and project profits.
Therefore, the existence of this management accounting is very crucial because it involves the profits generated by a company in a certain period of time.
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2. Combine Profit and Loss Statement and Cash Disbursement Monitoring
In the business world, money is “king”, regardless of the type or size of a business.
Earnings management that works effectively can provide an overview of how the company can save money or expenses.
In addition, this management also functions to generate cash and prevent the company from going bankrupt.
To achieve this, it must be regulated properly and efficiently in the use of accounting software , especially in terms of monitoring expenses.
Furthermore, this one accounting management also functions in helping a business to save finances when combined with an income statement.
In particular, it can help the company’s finances when the company is experiencing difficult times.
By combining these two business strategies, an efficient and effective management of business income will be created.
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So, it can be concluded that this one management function is very crucial in a company.
3. Outsource Team for Profit Management
The next earnings management function is as an outsourced team.
In an organization or company, making income statements tends to be difficult when there is a lot of bureaucracy in the company.
In addition, you will find it difficult to make projections when involved in a company.
Therefore, building partners with a team of public accountants and bookkeepers is the right solution because it can produce a business strategy that will generate a lot of profit.
Factors Emerging Earnings Management
This management does not just appear, but there are factors that cause the emergence of this management.
So, here are three factors that cause the emergence of earnings management practices that you need to know.
1. Accrual Management
The first factor that could be the cause of the emergence of this one accounting management practice is accrual management.
Accrual management is generally related to all activities that can affect the company’s cash flow and company profits.
2. Mandatory Accounting Policies
The second factor that could be the cause of the emergence of this one management is accounting policies that are mandatory to apply, such as if a company requires the use of bookkeeping applications in all accounting activities.
This relates to the decisions of company managers in the application of certain accounting policies that are mandatory.
3. Voluntary Change of Assets
The third factor is voluntary changes in assets.
This one factor is generally related to the efforts of company managers in changing or replacing a particular accounting strategy.
However, the change in accounting method is not arbitrary, because it must have an accounting method that has been recognized by a recognized accounting body.
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Profit Management Pattern
In addition to the understanding, functions and factors of earnings management, you also have to know what are the patterns in this accounting management.
In general, there are 4 patterns in management accounting, as explained below.
1. Taking a Bath
In the taking a bath pattern, company management needs to write off a number of assets.
In addition, company management must also charge the required range of costs in the future into the current financial statements.
Not only that, company management also needs to clear the desk so that profits in the financial statements in the next period will increase.
2. Income Minimization
The income minimization pattern is a management pattern that is carried out when the company’s profitability or profit is very high.
It is useful to gain attention politically. So, what should company management do?
What needs to be done is to write off capital goods and intangible assets, expenditure on research and development of products or services, as well as advertising costs.
3. Income Maximization
Contrary to the previous pattern, the income maximization pattern is carried out when the company’s profitability is declining.
The benefit of this earnings management pattern is that it can protect the company from violating debt agreements and in order to get a large bonus.
4. Income Smoothing
Income smoothing is done by averaging the reported profitability for external reports.
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Profit Management Techniques
Earnings management techniques are steps to manipulate financial reports to make them look better than they really are.
The following are earnings management techniques, including:
1. Changes in Accounting Methods
The accounting method can be changed which is different from the previous period method. This can increase or decrease the company’s profit figures.
In addition, the accounting method also provides an opportunity for management to record a fact in a different way, such as changing the depreciation method from the sum of the years digits method to the straight-line depreciation method and changing the period of depreciation.
2. Accounting Forecast Policy
Management can influence financial reports with accounting forecast policies.
The following are some accounting forecast policies, including:
- Uncollectible receivables policy.
- Warranty fee policy.
- Policies related to court processes that have not yet been decided.
3. Shifting Periods of Expenses or Revenue
Management to move the period of costs or income is often referred to as operating decision manipulation.
Companies can change accounting practices, such as changing the amount of reported income, expenses, or assets.
So, that’s a review of what earnings management is in corporate accounting and I hope this review is useful for you.