Earnings management: Origins

This chapter seeks to describe the field of inquiry by defining the concepts of earnings quality, earnings management, fraud, and earnings manipulation. It presents the earnings management phenomenon, specifically, from whence it comes. It reviews the mainstream studies, and focuses on two types of earnings management: accruals earnings management and real activities earnings management. In addition, studies related to fraudulent financial reporting (or non-generally accepted accounting principles, i.e. non-GAAP earnings management) will be presented and discussed as well. Furthermore, this chapter presents studies on managerial incentives for earnings management. The most important incentives (or causes) for managing earnings are discussed and the contradictory results provided by some of them highlighted. Finally, a few offsetting causes that may interfere with these main incentives for managing earnings are presented.