The influence of enterprise management ability on earnings management quality

Abstract:Earnings management is a problem widely studied in foreigneconomics and accounting. This article starts with its definition, analyzes thepositive and negative effects of earnings management, and puts forward somecountermeasures on the current situation of earnings management.

Key words: Earnings management; Influence; Governance1.Earnings management

In order to maximize the utility and maximize the value of theenterprise, enterprises use certain accounting methods and means tomake the accounting choice. This behaviour is called as earningsmanagement. The main purpose of earning management is to interveneor influence the financial reports, and then influence the interests anddecisions of the stakeholders. Earnings management is a kind of profitmanipulation, but it is not the common profit manipulation. Profitmanipulation is that someone make profit increase or reduce purposelythrough illegal methods, and earnings management refers to companyconsciously choose the accounting policy that is beneficial to it’s ownby taking advantage of the alternatives of accounting standards andaccounting systems.[2]

2.The influence of earnings management

Earnings management is a neutral word, and there is no good orbad point in itself. Earnings management can be regarded as adouble-edged sword. It has two sides to the different stakeholders andthe development of the enterprise.[1]

2.1 The positive impact of earnings managementEarnings management has its undeniable positive impact, whichis an important skill that the financial manager must master.

1. Moderate earnings management can reduce contract costs.

Allowing earnings management within a certain range will notonly reduce contract cost, but also overcome the incompleteness andrigidity of contracts, and protect the interests of enterprises andoperators.

2. Moderate earnings management is a means of transmittinginternal information.

The management authority's earnings management will deliverthe internal information of the enterprise, thus making the accountinginformation more fully disclosed and the market more effective.

3. Moderate earnings management helps to build up a goodcorporate image and enhance investor confidence in the enterprise.

Enterprise manager carries out the earnings management bymeans of profit smoothing and profit maximization. It can convey thatgood roduction and operation status to the outside, to enhance thecorporate image, reduce the impact of the capital market volatility oninvestors' decision-making behavior, and enhance the confidence ofthe investors.

2.1 The negative impact of earnings managementEarnings management is legal within the scope of accountingstandards, but when the earnings management is more than areasonable degree, it will have a negative impact.

1. The misuse of earnings management in China has causedserious distortion of accounting information.

Earnings management often makes the accounting informationdisclosed on the report lack of sufficiency and comprehensiveness, andeven lacks objective authenticity, which makes the reliability of thewhole financial report greatly reduced. In China, the abuse of earningsmanagement has become one of the most important reasons for thedistortion of accounting information.

2. It has a negative impact on resource allocation.

The administration authority delivers untrue earnings informationto investors and creditors through earnings management. It willmislead the decision making, make the decision maker have"unfavorable choice", make the social resources not effectivelyconfigured, and damage the efficiency of the whole society.

3. It has a negative impact on the long-term interests of theenterprise.

The abuse of earnings management may bring some benefits tothe enterprise in the short term, but it has a negative impact on thelong-term interests of the enterprise. Earnings management willundermine investors' judgment on the quality of earnings and lead to adecline in the market value.

3.The governance of the earnings management

In the specific economic environment of our country, theeconomic system is not complete and the legal system is not perfect.

When our listed companies make earnings management, they oftenbreak through their legal boundaries. Therefore, improper earningsmanagement is flooding, which harms the interests of investors,creditors and other external information users, and disturbs the orderof securities market. Obviously, the negative effect of earningsmanagement in China's listed companies is far greater than its positiveimpact. In this regard, we need to take some measures to controlearnings management, control it in the scope of the accountingstandards, and minimize the negative effects.

3.1 Improving the accounting standards and accounting systemsto ensure the quality of accounting information disclosure.

In order to adapt to the changes in the economic environment, theaccounting standards have an alternative space in the formulation ofthe accounting standards. In addition to the emergence of neweconomic operations, the identification, measurement and reporting ofsome transactions and economic matters have not been stipulated inthe relevant guidelines. Therefore, the accounting standards lagbehind the development of practice and the innovation of economicbehavior to a certain extent. This provides a lot of space for theoperation of earnings management.

The new accounting standards issued in 2006 are more reflectedin the convergence of the international accounting standards , andhave great positive significance. Among them, impairment of assets,inventory valuation and scope of merger have reduced the space ofearnings management, and to a certain extent, improve the quality ofaccounting system. It is necessary to continuously supplement andamend the specific accounting standards and accounting systems thathave been introduced. For larger accounting policies, more detailedrestrictions should be laid down, and the conditions for differentaccounting treatment methods and estimation methods should be setmore clearly, so as to reduce the adjustable space. At the same time,we should improve the information disclosure system, and provideclear and specific rules for the disclosure, such as the content, way andtime of disclosure of listed companies' accounting information, thusimprove the openness and transparency of information, reduce theasymmetry of information.

3.2 Improving the corporate governance structure