The Alarming Shift from Earnings Management to Fraudulent Financial Reporting

Abstract

The increase in fraudulent financial reporting and the escape from a conviction for the crimes has caused concern among society. Financial statement fraud firms argued that misleading information provided in financial reports was unintentional and claimed that it was acceptable to alter financial data within certain parameters and it was not fraudulent. This study aims to investigate the misconception of earnings management and fraudulent financial reporting. This chapter is developed from extensive readings of previous literatures on earnings management and fraudulent financial reporting. There are overlapping concepts between earnings management and fraudulent financial reporting. Earnings management is beneficial to both organisations and stakeholder where mistakes and omissions are treated as unintentional errors, unlike fraudulent financial reporting. This chapter reported the thin line that separates lawful earnings management and unlawful fraudulent financial reporting activities. The thin line between earnings management and fraudulent financial reporting stressed the need to adhere to the GAAP and FRS to ensure that financial alterations made are within acceptable limits to ensure transparency. It explores the possibilities to distinguishing between earnings management and fraudulent financial reporting in pursuing financial transparency This chapter highlights that auditors need to play an active role in ensuring that clients are not accused of altering financial income and are sensitive to the limits of shifting in accounting standard practices that can lead to financial record misstatements.