Managing earnings involves the manipulation of financial reporting by publicly traded companies in order to misrepresent how well they’re really doing. Companies might insert a low-ball estimate of bad debt or delay the announcement of a capital project — anything that can help a struggling public company report an extra cent or two of earnings per share in its quarterly or annual statement and avoid negative buzz and a stock sell-off.

Lots of firms engage in it; rarely are they punished. A recent exception was Under Armour, the American sports equipment manufacturer that recently settled an enforcement action with the United States Securities and Exchange Commission.

Earnings management may be a form of financial fraud, but there are plenty of defenders who say accounting standards allow for managerial discretion in reporting earnings. Besides, when firms manipulate their books, aren’t they hurting themselves more than anyone else?

It’s this seeming lack of an identifiable victim that has led many accounting professionals and researchers to conclude that it’s no big deal. New research, however, reveals a darker story.

Two recent studies show how a company’s obsession in meeting earnings expectations can victimize vulnerable employees. One documented higher workplace injury and illness rates in firms that meet or just beat analyst forecasts — the result of increases in employee workloads and out-of-the-ordinary reductions of discretionary expenses. A second study connected earnings management to corporate wage theft, which happens when firms fail to pay employees for overtime or force them to under-report the number of hours worked.

Increase in air pollution

A new study we conducted with Hongtao Shen and Yang Zhao of Jinan University in China and Zheng Liu, a doctoral student at Smith School of Business at Queen’s University, showed an even wider fallout from earnings management — an increase in air pollution, with long-term health consequences.

We based our study on a hunch that pollution reduction costs would be a prime target for struggling firms feeling pressure to meet earnings targets. Most emission reduction expenditures are variable costs that can be reduced by switching off abatement technology, such as sulphur dioxide scrubbers, and switching them to full power when inspections are imminent.

Read more:
https://theconversation.com/when-companies-massage-the-books-the-environment-takes-a-hit-163148