Solved: Define and describe the role of business managers in relation to earnings management

Define and describe the role of business managers in relation to earnings management. Describe one of the main challenges managers face in this role.

Expert Answer

Let us begin with describing earnings management. This is to use accounting techniques which aid in producing financial reports which show a positive view of the company’s activities and present an inflated financial position. This is used to smooth out fluctuations in the earnings and present a more stable financial position as it calms nerves of investors who prefer to invest in an organization with a stable financial position.

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The role of business managers with respect to earnings management can get real tricky. They have to make sure that in the process of portraying a stable financial situation they should not present an incorrect or misguiding financial position of the company. This is one of the main challenges that managers face in this role.

Furthermore, as business managers for earning management one has to come up with policies and steps to make sure that when the investors are shown the financial statement it comes across as clean and stable as well as attractive and assuring enough for the investors to have faith in the organization. They have to do all this keeping in mind the accounting principles are not violated.

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