Although it is true that generally accepted rules in the management of accounting practices should dictate, along with common sense and ethics, governance of financial reporting that extends to the application of short-term or long-term earnings, a discussion of key elements drives the following fundamental concern which ultimately relates to both nonoperating events and accounting policy choices. These twin areas of concern have been left alarmingly devoid of any astute attention, and particularly in terms of quality of input of financial information. After reading “The Dangerous Morality of Managing Earnings,” which textbook author Charles H. Gibson cites as a reprint source gleaned from a writeup by The National Association Of Accountants, the task herein engages a fulfillment of making a commentary about the five generalizations derived from the context of professionally experienced case examples, to discuss management's ability to control long-term earnings in light of the operational manipulations exposed.
Viewing operational manipulations as more favorable to manage short-term earnings, versus juggling accounting methods, seems somewhat of a hypocritical veneer to balance a finance report. It's also against accounting ethics. In the long-term earnings scenario, such operational manipulations by changing procedures and decisions may be able to improve how a company looks on paper, or to its shareholders if it's a publicly traded corporation, but there needs to be more integrity. Sure, everyone understands these are tough times in an ever rapidly unfolding change of global economic events. Nevertheless, most managers and controllers themselves viewed fudging operational procedures as quite unethical. Tighter accountability teamwork may be in order.
Earnings directions, whether increased or decreased, should not matter in terms of sticking to reasonably accurate financial reporting and honesty in keeping to the books, particularly in a long-term situation. Common sense tells you if you were to engage in a bit of manipulation in the short-term, such as 'robbing-peter-to-pay-paul' as the old saying goes, in an applicable situation of paying one's personal bills is one thing, while long-term financial management of an organization is quite another. Even if you engage in changing earnings to reflect smaller revenue intake, as opposed to showing an increase in the long-term earnings, such accounting infractions eventually become one and the same. What is meant by that? Simply that the lines between what is ethical, questionable, or downright unethical will become blurred, and thereby too hazy to distinguish any right from wrongdoing. Direction makes no difference.
The textbook's author perhaps implied it best. “Materiality matters” (Gibson, 2013). Lack of uniformity also displayed in the area of management judging small effects of not being as fraudulent as larger effective earnings manipulations is ridiculous. Long-term earnings can be devastated by falsely leveraging, padding, or otherwise skewing the accounting numbers to reflect even seemingly minute infractions or when representing the tiniest of distortions. You might liken it to an accumulative snowballing effect, which can create huge disparities in long-term operational manipulations situations.
As the time periods of reporting are weighted to varying anchors of morality, the shorter-term quarterly reports are perceived worthy of less stringency. Long-term operational manipulations in this area should not be considered as soft infractions because over the long haul, the shorter segments of sales, expenses, and so forth add up exponentially. It doesn't take a genius to figure this out, yet it may take Einstein to unravel an enormous trail of financial reporting manipulations, which often continues for years sadly going unnoticed, or worse – unchallenged.
How to manage earnings, whether by credit term extensions or excess asset selling, has legally binding jurisdictional ramifications attached to the activity. As one financial controller reported (Gibson, 2013) moving one earnings period to another, it may become clear that plugging up one hole in the backlog may create a future leak in the financial plumbing in the months or quarter(s) ahead. Even if some practice or method is technically legal, or technically not illegal managers may be hard-pressed to prove any real evidential capital gains in the long-term earnings management scenario. This type of greed was evident in Worldcom's business failings.
In summing up, manipulation of accounting procedures versus operational methods is a matter of playing a game of tit for tat and has no place in the professional world of business. Directions in earnings, in terms of the long-term situation, can have unwanted implications despite what is on the books. Small or large effects can be equally distorted when applicable to a long-term financial management task, as so noted. Time period based financial reporting, in the long-term earnings management decision making, may cause serious exponential consequences in the end. Managing earnings and profits must be decided, in terms of longer-term earnings manipulation may allow credit extensions to cover a period or selling off excess assets, but the preferred method is to remain within legal and reasonable ethical limits.
Gibson, C. (2013). Financial reporting and analysis – 13th edition. Mason, OH: South-Western Publishing Company.