Aggressive earnings management - a threat to corporate reporting
A report published by the Institute of Chartered Accountants in England & Wales (ICAEW) warns that the threat of aggressive earnings management to UK corporate reporting is likely to increase with the introduction of International Financial Reporting Standards (IFRS).
?Aggressive earnings management' refers to using accounting policies and stretching judgements of what is acceptable to present corporate performance in a more favourable light than the underlying reality. The survey of anonymous interviews with audit partners, finance directors, audit committee chairmen, investment analysts and senior financial journalists found that aggressive earnings management, while perceived as less of a threat than in 2001, ?will always be with us'.
Interviewees feared the threat would increase if the economic climate moved towards recession or if the current post-Enron vigilance falters. Almost all believe there are two key motivating factors giving rise to the threat of manipulation of figures ? the need to meet or exceed market expectations and the gearing of director and management income to results.
Andrew Ratcliffe, Chair of the Institute's Audit and Assurance Faculty, comments: "There have been a raft of changes in corporate reporting and auditing over the past three years and on the whole the new regulation and increased awareness have resulted in aggressive earnings management presenting less of a threat.