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

Due to low revenue in the third quarter, the company used earnings management which showed the investors that the company is in better shape than it actually is.

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