EARNINGS MANAGEMENT AND FRAUDULENT FINANCIAL REPORTING

Abstract

Earnings management and its theoretical connection to financial statement fraud in Nigeria were the focus of this article. A critical review of the existing literature from a conceptual, theoretical, and empirical vantage point reveals that managers may engage in earnings management activities when they have discretion over accounting or operating decisions or when they are attempting to convey confidential information to stakeholders or users of financial statements. Those who rely on financial reports need to know which method is being used and why that matters. Earnings management, which makes a firm appear better than it is, may lead to disenchantment for the individual investor and, through misdirected resource allocation, a loss of welfare for society as a whole. It is hypothesized that raising investors' level of awareness about the prevalence of profits management would lead to better investment decisions and greater social welfare. If standard-setters can identify areas where earnings management is widespread and has a material impact on profits and resource allocation, they might investigate measures to tighten existing accounting rules and increase disclosure requirements to improve financial reporting. When earnings management does occur, but is uncommon and has a little impact on resource allocation, there is less of a need to alter financial reporting standards.