earnings management

Definition

Manipulation of a company's financial earnings either directly or through indirect accounting methods. This is more likely to occur when a company habitually is unable to meet investor expectations or in periods of volatile earnings. Earnings management is often considered materially misleading and thus a fraudulent activity. Even though the changes may follow all of the accounting standards and laws, they may go against what the standards and laws were originally trying to establish. For example, a change from FIFO to LIFO in inventory management may help a company's financial ratios, but may not reflect the true value of its inventory. See creative accounting.

Use earnings management in a sentence

Betty changed her bookkeeping style as a means of earnings management to cover the fact that the law firm was loosing money.

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I found out yesterday that my favorite equity was using earnings management and its value has since plummeted and I had to sell at a loss.

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Our company CEO was required to step down after the Board of Directors accused him of engaging in earnings management by shifting the dates of certain contracts around.

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