Earnings Management versus Managing Earnings
'Earnings management' or 'income smoothing' is a widely accepted practice in corporate accounting. This is the practice of advancing or delaying accruals to 'smooth out' net income. If income is not smoothed, earnings will be highly variable, causing this company to be perceived in capital markets as risky. Basic finance theory states that the higher the risk, the higher the return investors will demand. So, if companies don't 'smooth income, their capital costs will increase. This is an accepted practice. Should it be?
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