CASE STUDY 9.1
THE ETHICS OF EARNINGS MANAGEMENT
The
directors
of almost any organisation, whether business, government, or non-profit, must
manage the organisation's external disclosures
. .
A
common
method
of managing
disclosures is to manage earnings.
Because
New
Zealand
applies substantially
the same accounting standards to public and private organisations,
public
sector bodies can manage earnings in much the same way as businesses do
.
The
ethical status of earnings management is controversial
. Whether acts of earnings
management are ethically justifiable
depends
essentially
on management's intention either to
be truthful or to mislead
readers of the statements. This article looks at the ethics of
income
smoothing
, which is one form of earnings management.
The financial reports of the New Zealand Symphony Orchestra Ltd (NZSO) during the
late 1990s
provide a useful example of income smoothing. Based on the publicly available information
contained in its financial statements, we can conclude that the income smoothing conducted by the
NZSO in the late 1990s is
informative
and
not misleading
, and therefore is
ethically justifiable
.
Through
this example,
we can see that income smoothing, which is a specific type of earnings
management, is at least sometimes ethically justifiable.
