IMPACT OF EARNING MANAGEMENT ON DISCRETIONARY AND NON-DISCRETIONARY ACCRUALS

INTRODUCTION

EARNING MANAGEMENT

“The use of accounting techniques to produce financial report that contain positive picture of company’s business activities and financial position”

Earnings are the profits of a company. Investors and analysts look to earnings to determine the attractiveness of a particular stock. Companies with poor earnings prospects will typically have lower share prices than those with good prospects. Earnings management consists of two kinds, namely accrual earnings management and real earnings management.

ACCRUALS

Accruals are adjustments for 1) revenues that have been earned but are not yet recorded in the accounts, and 2) expenses that have been incurred but are not yet recorded in the accounts. Earnings management: Studies related to earnings management mostly related to accruals.

An example of an accrual involving an expense is an employee's bonus that was earned in 2012, but will not be paid until 2013. The 2012 financial statements need to reflect the bonus expense and the bonus liability. Therefore, prior to issuing the 2012 financial statements an adjusting entry is prepared to record this accrual.

DISCRETIONARY ACCRUALSNon-obligatory expense (such as an anticipated bonus for management) that is yet to be realized but is recorded in the account books.

NON DISCRETIONARY ACCRUALS

A non avoidable expense that has been recorded in the account statements, but has yet to be fulfilled. For example, next month’s electricity bill.

LITERATURE REVIEW

In recent decades, many studies have been done in the context of earnings management. Most studies are discussed on identifying the motives, means and factors affecting earnings management. From Healy & Wahlen point of view, earnings management occurs when managers use their own judgment for financial reporting and do this act aimed to confuse some shareholders about the true economic performance or to influence the outcome of the contracts based on reported accounting numbers.

Earnings management: Studies related to earnings management mostly related to accruals.

From Degeorge point of view, earnings management is a kind of artificial manipulation of earnings to reach the expected level of profits for some specific decisions

METHODS

In order to collect data, directly use financial statements of companies, attached notes and stock trading reporting. Initial processing of the data was performed by using excel and SPSS and Clementine SPSS statistical software was used for analysis. We use multiple regression in order to test variable.

CONCLUSION:

Accrual earning management can increase firm value significantly. In other way real management cannot affect firm value. Earning management can be benefical to shareholder. It is because manager manages earnings to give some information that are not conveyed in unmanaged earnings.

Earnings management sometimes confuses financial statements while financial statements do not have any problem in the context of accounting standards and auditors can’t be wrong of financial statements about this opinion.

Results indicated that reverse relationship exists between earnings management and both discretionary and non-discretionary accruals. It also indicate that there was not significant relationship between debt ratio with both of discretionary and non-discretionary accruals.