【正文】 as “distorting the application of generally accepted accounting principles.” Arthur Levitt, the old SEC Chairman, defined earnings management as “practices by which earnings reports reflect the desires of management rather than the underlying financial performance of the pany.” however, investors bee enraged when quarterly or annual earnings forecast are not met by firms. Therefore, investors and the public view minor earnings management as acceptable and an everyday business practice. In response to public plaints and concern for earnings management, the SEC has issued bulletins to help prevent earnings management.2. The Public Perception of Earnings ManagementEarnings management has a negative effect on the quality of earnings if it distorts the information in a way that it less useful for predicting future cash flows. Within the Conceptual Framework, useful information is both relevant and reliable. However, earnings management reduces the reliability of ine, because the ine measure is biased (up or down) and/or the reported ine that is not representationally faithful to that which it is supposed to report (., volatile earnings are made to look more smooth).The term quality of earnings refers to the credibility of the earnings number reported. Companies that use liberal accounting policies report higher ine numbers in the shortrun. In such cases, we say that the quality of earnings is low. Similarly if a nonrecurring gain increases ine, but the gain is obviously not sustainable, then the quality of earnings is considered low.For the markets to work efficiently, it is vital that investors be able to trust the earnings numbers of the panies in which they have chosen to invest their capital. However, it is interesting to note that the investing public does not necessarily view minor earnings management as unethical, but in fact as a mon and necessary practice in the everyday business world.earnings management damages the perceived quality of reported earnings over the entire market, resulting in the belief that reported earnings do not reflect economic reality. Investors rely on financial information provided by the pany to make their investment decisions, and when investors believe they are being given meaningless information they bee wary of trusting the panies they have invested in. This uncertainty ultimately has the potential to undermine the efficient flow of capital thereby damaging the markets as a whole.4. Incentives to Manage EarningA. EXTERNAL FORCES ? Analyst Forecasts Companies are under extreme pressure to meet analysts’ earnings estimates in order to prevent large drops in their stock price. ? Debt markets and contractual obligations Companies depend on achieving certain earnings figures to obtain access to debt markets, or even to meet their current debt covenants and other contractual obligations. ? Competition There is pressure in highly petitive industries to stay at the top of the industry in terms of revenue or market share. This can provide pressure for management to boost earnings to meet the pany’s own expectations. ? Unlawful transactions Some panies even use earnings management to cover up their own unlawful transactions such as embezzlement, fraud, misappropriation, and bribery.C. PERSONAL FACTORS ? Personal bonuses Some pensation policies are heavily weighted towards incentives, and individuals hope to receive a bonus based on their good performance.? Promotions and job retention Fudging numbers to make performance look better may lead to personal promotions, or even help to retain an employee’s current job.5. SEC Response to Earnings ManagementRecently, several staff accounting bulletins concerning earnings management were released by the SEC and many more such regulations have been promised in the future. Recent publicity of high profile earnings management from some of the nation’s most elite panies, bined with a sagging economy have heightened investor’s fears about the occurrence of earnings management.This crusade resulted in a torrent of staff accounting bulletins beginning with the issuance of SAB 99 regarding Materiality in August of 1999. Since a favorite practice of corrupt management is to justify earnings management by claiming it is immaterial, this statement is particularly helpful to current and future auditors. Another favorite ponent of earnings management was addressed in March of 2000 when SAB 101A concerning Revenue Recognition was released. Finally, July of 2001 saw the issuance of SAB 102 concerning Loan Loss Allowances, another preferred tool of earnings management. These bulletins will not pletely prevent earnings management, and therefore they will not be the last of their kind. however, it has inflated its growth in the near term, and reduced profits in the future period.e. Merger and acquisition activitiesOne type of significant event that may be used to mask other chargeoff is mergers and acquisitions. In most cases, there is some form of restructuring involved creating the need for a large onetime charge along with other mergerrelated expenses. The event provides the acquirer with the opportunity to establish accruals for restructuring the transaction, possibly attribute more expense than necessary for the transaction. The pany may also identify certain expenses that are revalued on the seller39。s entitled Pooling and Fooling brought attention to the use of pooling accounting by Cisco Systems to inflate its operating earnings. Cisco has been an active acquirer paying $16 billion for twelve panies in fiscal 2000 alone, but through the use of pooling accounting, Cisco only recognized only $133 million in cost in its capital accounts for these transactions. In addition, five of the acquisitions were deemed too immaterial to restate prior period financial statements. Brilloff contends that Cisco39。s determination to meet Wall Street analyst39。. According to the SEC documents