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Introduction of Earning management
Earning
management is the most crucial part of every organization because it focuses on
the earning of the company and managers are responsible for this act. Earning management also create the wrong
position in the reports of a specific period and whoa the wrong earning of the
company. The earning management is considering in the organization as
problematic, particular and pervasive. But with time, the pervasive earning is
skip and management more focus on income adjustment according to the current
situation of the company
The
management considers that earning management is not too much problematic as earning
management does not consider through the hypothesis of an efficient market, if
the motive is opportunities then it is going to be problematic and estimation
of accruals is the heart of financial reporting as it is a process of
estimating accruals. Sometimes the earning management has to present the
earning according to a condition where the research methodologies are not good
enough and the earning identify through management. On financial reporting, no
additional earning management results can be found in a better way for the
company
Earning
management is more beneficial if it more focuses on the valuation of the firm,
earning management directly related to the incentive of managerial and its move
toward the stock price performance of the company. Income smoothing has defined
the income of company more precisely and this procedure is mention according to
time profile of manipulating the earnings and to develop the reported income
less variable for earning reports and on the other side the reported earning is
not increase for long period. In different organizations. This process used by
managers to show an increase in its earning of the report when the actual
earning is relatively low and also how a decrease in earning when actual earning
is relatively high
The
basic purpose of this paper explains the concept of income smoothing related to
the variability of earning according to the variability of sales in the
organization. In different economic sectors, income smoothing has been examined
in different settings. The effect of smoothing behavior also presents the size
of organizations. The large companies use less smoothing behaviour as compared
to small companies. With diverse results, income smoothing determines different
results in different countries. Because of the difference in culture, accounting
sub-culture and societal value, the accounting follows a different pattern in
the different parts of the world.
Instead
of implementing detailed legal requirements, it is very important to present a
true and fair view of the financial area of the company. Instead of uniformity,
it concerns with more flexibility according to consistency and comparability
aspect. In Korea, many companies are related to smooth behavior. Normally the
manager uses research and development concepts for implementing the income
smoothing. Income smoothing put pressure to stability to shareholders and also signals
growth and also caused less transparent practice. The concept of income
smoothing helpful to determine the value of a firm in major terms.
In
accordance with the research findings of Peterson and Arun (2018), the income
smoothing concept is mainly related to the stability mechanism of banks.
Moreover, they also claim that in small and large size corporations income
smoothing is being used as a strategy for earning management. In this strategy,
management of the organization follows up this strategy to generate a positive
impact on the overall financial outcomes of the company. Income smoothing
strategy contributes to the systematic cash and distress risk management in the
organizations. Moreover, the researcher identified that income smoothing
enables the managerial staff to develop the right strategies for the financial
crisis. In the financial crisis, organizations particularly banks face setbacks
regarding which companies and banks implement income smoothing strategies to
cover-up major financial risk issues (Peterson & Arun, 2018).
According
to the research outcomes of Demerjian, Donovan, and Lewis (2019), income
smoothing draw impact on the uselessness of the earnings for contracting.
Income smoothing increases earning based covenants. Furthermore, researchers
identified that income smoothing has the capability to improve the earnings of
a firm which reflecting on the credit risks and dealing with technical default
concerning with the contract inceptions. Relating to this research work, income
smoothing is specifically focused on the financial intervention and causes to
support lower variance in the earnings reports of an organization over time. In
general, researchers consider it a strategy triggering the consequences of
managerial discretion in the financial outcomes of the organization.
(Demerjian, Donovan, & Lewis-Western, 2019)
According
to the research findings of Etemadi and Sepasi (2007), income smoothing is a
deliberate dampening of earning level fluctuations in an organization. Income
smoothing was viewed as an immoral act and cheating in the financial details of
the company. Following the research findings of researchers, income smoothing
practices are quite common in Iran. Many firms are using this strategy to
increase the value of their organization in the targeted stream. Somehow,
research studies discussed in this research work agree with the fact that
income smoothing can also have a positive impact on the firm values if these
practices are supported by ethical values and accounting standards. (Etemadi
& Sepasi, 2007)
According
to the research findings of Tucker and Zarowin (2006), income smoothing
improves earnings informativeness in an organization. The research paper states
that income smoothing is concerned with the future earnings and cash flows of
an organization. Following the findings, changes in the stock prices provide
more details regarding the firms with smoothing activities as compared to the
firms with lower smoothing firms. Researchers analyzed the informativeness of
various firms using income smoothing practices. Reaching the conclusion,
researchers identified that income smoothing is positively linked with the firm's
value and price-earnings ratios.
Following
the research findings of Huang, Zhang, Deis, and Moffit (2019), income
smoothing can be created artificially by the use of abnormal accruals. While a
real income smoothing complies with the derivates of an organization that
contribute to enhancing the overall value of a firm. Furthermore, they found
that income smoothing draws a different impact on the income smoothing.
Although the act of income smoothing in the organizations is also linked with
the financial derivatives pronounced in weakly governed firms and agencies.
Organizations with strong auditing practices and fair independent boards are
less likely to involve in such practices unless the firm value itself increases
by over-involvement of derivates in the business. (Huang, Zhang, Deis, &
Moffitt, 2019)
Summarizing
the research outcomes of Yu, Hagigi, Stewart (2017), there are some drawbacks
of income smoothing practices. The firms using income smoothing to enhance
their firm value must consider these drawbacks to avoid negative consequences.
Income smoothing represents managerial opportunism which is directly linked
with the higher information risk in the organization. Such artificial or fake
income smoothing practices can increase risk factor linked with the earnings
announcement system which is the most undesired outcome for the shareholders
and investors of the firm (Yu, Hagigi, & Stewart, 2017).
Amiram
and Owens (2018) conducted a research study on the topic of income smoothing
and concluded the results in favour of real income smoothing practices in the
firms. Although, researchers were against the unethical practices of income
smoothing in the organizations. Researchers used binary exposition technique in
the research. Findings suggest that income smoothing practices do not consume
value extractive private benefits. Instead, additional non value extractive
private benefits can be extracted from the income smoothing practices in the
firms. (Amiram & Owens, 2018)
Visionary
Management dreams about the future and transforms goals and objectives to
achieve the place shortly. They focus on goals with the help of their
inspiration and commitment with the ability to anticipate change and handle the
situation proactively. They make their team organization rich through their
vision and they don't take control over their employees or impose their plans
on employees whether they are keen to give freedom of speech and freedom of
actions to their employees to keep moving them towards leader’s vision It is
necessary to have a visionary leader in an organization because they contain an
inspiring vision with an alignment of goals to achieve such vision. Visionary Management
is emotionally intelligent and open-minded that holds a big picture in mind
with a clear path on how to get there. They are the imaginative yet true
dreamer of their visions who develops away in their mind to see beyond the
physical world. They know that every time they will face hurdles and setbacks
Transactional
Management works through a chain of command to get things done while working on
the assumptions that it will motivate the workers if we produce rewards and
punishment for them. The transactional leaders are tending to make a system
where rewards are given and discipline is made. They think that if a person is
given with salary and other benefits then the company has full rights on it and
he/she is completely responsible for the work he/she is assigned for. This type
of Management is required to motivate the team to acquire the desired
performance from them. It is simply stated that all of the acts of the employee
is conditioned with the reward or punishment, if he/she meets or exceeds the
expectation then there is a reward for them otherwise they will be punished in
case of any deviation. One of the main characteristics of transactional leaders
is that they are way more practical than others and while going through hard
times they consider the real problems and hurdles to counter them from the root
and lead the team towards opportunities. There is no room of change in
transactional leaders as they are tending to follow the mentioned rules for a
long time regardless of changes in the external environment
Servant
Management is based on the foundation that they are servants first and then
they are leaders. They tend to work with their subordinates rather than
dominates. They empower the subordinates so that they would inspire them to let
them perform. These leaders are tending to provide importance towards
communication and decision making which allows them to commit to listening to
their subordinates or team members intrinsically. Healing is the major strength
of the servant leaders which makes them create and maintain a strong
relationship with others. They tend to be engaged with the people deliberately
so that they can show their concern if anyone has been hurt emotionally. This
strength leads them to create a strong relationship with others based on
emotions. Other types of leaders focus only on general awareness but servant
leaders also focus on the self-awareness which helps them to understand the
issues and they will be able to handle the situation more closely and
powerfully. These are persuasive rather than to impose decisions on others and
they seek people to be convinced through their actions. They have a strong
ability to foresee the results of the situation that is hard to define and it
enables servant-leaders to understand the lessons from the past, cater the
situations of the present and consequences of the decisions shortly
It
is the first level of Management in which no ability or effort is required to
achieve something or you can say it is just the lowest level of Management.
There is nothing wrong with this position because you have to appoint someone
on this position. After all, you have to leverage your followers. On this
level, if people remain in it then they will find difficult to work with
volunteers because volunteers are aware that they have to follow anyone. At
this position, the influence of the leader comes from the way of the job title.
This level is based on the rights granted by the position and there will be
never a leader on this level instead of boss only. They have no influence on
others at this level and they tend to be more independent as compared to other
levels. To get this level, they do not require any effort or ability because
anyone can be appointed to this position but he or she has to put their efforts
so that they can be transferred to next level of Management. At this level of Management,
leaders need to develop something that will be appreciated because at this
level they do not influence their team members
People
who are working on this level are not motivated at all to put a little extra
effort into the work through which they can show their talent and expertise. At
this level they are not engaged fully and whether they avoid working or change
their job because they did not feel engaged with the manager or the
organization. Getting this title from the organization means that you have to
show your skills and expertise to grow to level 2. This level is based on a
relationship where people chose to follow because they want to do so. To
achieve something on the level, the leader connects with the other people and
they tend to know them for creating a relationship among them. They create
influence on their team by treating them as individuals and with the help of
this, they develop trust among them. Their main purpose is not to get their
position preserved but they do to make a solid connection among them. They
think that when you are emotionally attached to the people or team you can
easily. start knowing them and this will create long-lasting relationships.
They create a positive influence on others which create a healthy and positive
environment
There
are lots of hypotheses that explain the utilization of income smoothing
according to the size of the firm and also manage the value of the firm in term
of income smoothing. Two basic hypotheses according to this terminology explain
that;
Hypothesis 1: Firms with
greater size tend to smooth income less compare to firms with smaller size.
-Pearson correlation, OLS
-IS= Firm’s size +
Control Variables+ ……
The
hypothesis is developing for making such assumptions for the organization
according to its conditions and setting a variable that determines the size of
the organization and then manages the income smoothing according to its size. Pearson
correlation help to explain the variable related to the organization when the
hypothesis is considering null according to other variables and factors. The
company also uses OLS methods to determine the estimations according to the
organization's requirement. OLS means the ordinary least squares according to
different statistics. It is a type of linear least squares method that working
on unknown parameters in the linear regression model according to company
requirement.
The
size of the firm is also depending on progress and income. When the income
smoothing concept implements in the determination of the value of the firm then
it is understandable that the size of the firm is very important in this
regard. Small companies using less income smoothing as compare to large
organizations
Because
small companies have to manage their internal activities and functions and
income to limited people. But large organizations have to share their
information on earning in front of executive management and shareholders to
attract maximum investment opportunities. According to different firm size, the
company has to consider different variable under the control of the
organization. It means that in determining the income smoothing concept, the company
have to manage different variable that can be controllable and show a major
impact on the size of the company. The income smoothing helpful for large
organizations to manage and making presentable their income in front of the
outsider of the company. it manages the earnings report in a better way and
enhances the scope of business terms to generate more opportunities for
enhancing the business at a large scale. So income smoothing s not very
effective but it also used many organizations to make their income more
presentable and attractive for obtaining benefits.
-Tobin’s Q = income
smoothing + Control Variables+……
The second hypothesis
explains the value of a firm in a better way. This part explains the research
about the enhancement of the value of the firm according to income smoothing
practices. Accountants never are successful by using the accounting techniques
and transaction in the deceiving markets according to efficient market theory. But
it is also a considerable thing that on the firm value, the income smoothing
practice provide positive implications. Regarding the firm's future
performance, the process of income smoothing incorporates private knowledge. As
a way to signal the quality of rim, the consistent levels of reported earnings
are thought of according to organization point of view. It minimizes the risk
of the organization and also makes this knowledge favorable for the wealth of
shareholders. It also minimizes the cost of debt and also the chance of
bankruptcy in the organization. On the other side, the value of the firm
increases. Income smoothing minimizes the expected cost of default and
renegotiation and lessens the probability of financial ration covenants.
The
report stables the earning as it feels more confident for the company. The
satisfaction of shareholders and growth rate is increasing with the stability
of income and management also considers the reported income. Higher stock price
and higher dividend rate are led by the smoother level of income. It also affects
the value of the firm favorably and widens the market of the company ‘s share.
It is a common term that investors never follow the investment tasks of those
organizations that mostly use income smoothing. With the smoother earning stream,
an institutional investor tends to prefer companies. By using the income
smoothing practices, the prospective of perception of investors influence the
value of the firm
To
predict future cash flow, income smoothing enhances the ability of investors.
The income smoothing promotes the value of firm according to all these
variables and this hypothesis helpful for the organization to manage its
earning and its value according to reporting earning. The value of a firm
depends on the income smoothing and also its related variables that can be
controllable for the firm. Firm generate multiple results according to the new
requirement and all the settlements according to income smoothing. Different
perceptions are useful for the organization to manage its report earning and
manage according to the reputation of the company. Value of firm depends on the
income smoothing according to the performance of different variable and manage
all the factors in a better way.
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