Unformatted text preview: and bets. Some fraudsters wish to make fools of their victims. They
take delight in the act itself.
take Risk of fraud is a product of both personality and
environmental (or situational) variables.
environmental Grace Duffield and Peter Grabosky, “The Psychology of Fraud,” Australian Institute of Criminology,
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,
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.
The term earnings management is used frequently confused
with earnings manipulation. The term earnings management
refers to management’s routine use of nonfraudulent accounting
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
“purposeful intervention in the external
financial reporting process, with the intent of
obtaining some private gain.”
– 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
3% or more
– One-third would try to influence reported
– Few think their auditors would catch
Chapter 3 Forensic and Investigative Accounting 29 Earnings Smoothing and Earnings
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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