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Ch03 Class Notes

G internal controls the three bs babes booze and

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Unformatted text preview: and bets. Some fraudsters wish to make fools of their victims. They Some take delight in the act itself. take Risk of fraud is a product of both personality and Risk environmental (or situational) variables. environmental Grace Duffield and Peter Grabosky, “The Psychology of Fraud,” Australian Institute of Criminology, Grace No. 19. No. Chapter 3 Forensic and Investigative Accounting 25 THE THIN LINE THE Chapter 3 Forensic and Investigative Accounting 26 Management Discretion, Earnings Management, And Earnings Manipulation Management, Management Discretion. With respect to accounting discretion, Management its legitimate use does not violate any ethics guidelines although some individuals complain about its use and would like it eliminated. Managers also make use of economic discretion. eliminated. The term earnings management is used frequently confused The earnings with earnings manipulation. The term earnings management earnings The earnings refers to management’s routine use of nonfraudulent accounting nonfraudulent and economic discretion. Earnings manipulation has a more nebulous meaning. It can refer either to the legitimate or aggressive use, or fraudulent abuse, of discretion. By definition, then, earnings management is legitimate, and earnings manipulation can be legitimate, marginally ethical, unethical, or illegal, depending on its extent. Earnings Management Earnings management may be defined as the Earnings “purposeful intervention in the external financial reporting process, with the intent of obtaining some private gain.” obtaining – Katherine Schipper, “Commentary on Earnings Management,” Accounting Horizon, December 1989, p. 92. December Chapter 3 Forensic and Investigative Accounting 28 Earnings Management Earnings CEO survey: – Half say they legally influence earning by Half 3% or more 3% – One-third would try to influence reported One-third results results – Few think their auditors would catch Few them them Chapter 3 Forensic and Investigative Accounting 29 Earnings Smoothing and Earnings Management Management Earnings smoothing is the manipulation of earnings to reduce their volatility. In simple terms, this means using manipulations to increase...
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