Do Banks and Companies Misstate Profits through Accounting Techniques

Are banks and private companies misstating company figures to make it appear that they are either losing or earning lower profits through accounting techniques? Companies employ accountants to make financial reports. Thus, from the perspective of accounting, what can we say on the situation? Are accountants being used by banks to misstate company profits? On a related point, how do we assess the earning management techniques with regard to their potential to be used by companies to understate company profits? In relation to the said issues, what do the professional ethics for accountants require for accounting professionals on the matter? What are some of the relevant literature on the issue? Some of the relevant materials on the subject matter being addressed by this work were the works of Mitre and Rodrigue (2002), Turner and Wheatley (2003), Laux (2003), and Lev (2003).Mitra and Rodrigue (2002, p. 185) defined earnings management as management’s intentional and opportunistic manipulation of financial reports for personal gain. According to Mitra and Rodrigue (2002, p. 185), there are three ways of earning management: via structuring of revenues and expenses, changes in accounting procedures, and accruals management (Mitra and Rodrigue 2002, p. 185). However, Mitra and Rodrigue (2002, p. 185) had stressed that accruals management is the most damaging to the usefulness of accounting reports because investors are made unaware of the extent of accruals.Nevertheless, Mitra and Rodrigue (2002, p. 185) clarified that earnings management does not always a negative connotation because management may have implemented an earnings management to provide a conservative or more realistic earning figures based on the GAAP or Generally Accepted Accounting Principles. Mitra and Rodrigue explained (2002, p. 185) that opportunistic behavior arises from earnings management because it is empirically difficult to differentiate earnings management that is opportunistic from what is done in the interest of a conservative portrayal of the company situation. The Mitra and Rodrigue (2002, p. 185) assessment is that management or researchers generally take an opportunistic perspective in view of the difficulty of separating legitimate from what is illegitimate in earnings management.