Factors resulting to earnings management.. Esther Nyamai

FACTORS RESULTING TO EARNINGS MANAGEMENT.(Burgstahler, D. and I. Dichev. 1997)
a. Window dressing
Refers to the company's decision to dress up the financial statements for potential investors and creditors. The goal of window dressing r is to attract new supporters by having financial statements that look like the company is doing great. The company needs to appear to have a history of being profitable, even if it means lowering profits in the accounting period to increase profits in another. That is, spreading the amount evenly over a specific time period.

b. Internal targets
Often times, the company has set its own internal goals such as departmental budgeting and wants to be sure to meet those goals. no department wants to be the one to blow the proposed budget; so earnings management balances this out.

c. Income smoothing
It comes into play here; because potential investors like to invest in companies that have a continuous growth pattern. Smoothing out income generated, when there maybe spikes at certain times and drops at others, allow it to appear like the company has that smooth growth pattern.

d. External expectations
They come into play when the company has made projections as to what their profits would be and investors now expect that exact amount of profits or more. Management may therefore feel the need to shift revenue from one accounting period to another in order tom meet the projected goal. Earnings management, quite simply, takes advantage of the different ways that accounting policies and procedures can be applied to financial reporting.