Companies are aware that analysts focus on profitability in evaluating financial performance. Managers have historically utilized a number of methods to improve reported profitability that are cosmetic in nature and do not affect "real" operating performance. These are typically subsumed under the general heading of "earnings management." Justification for such actions typically includes the following arguments:

• Increasing stock price by managing earnings benefits shareholders; thus, no one is hurt by these actions. Earnings management is a temporary fix; such actions will be curtailed once "real" profitability improves, as managers expect.

REQUIRED

a. Identify the affected parties in any scheme to manage profits to prop up stock price.

b. Do the ends (of earnings management) justify the means? Explain.

c. To what extent are the objectives of managers different from those of shareholders?

d. What governance structure can you envision that might prohibit earnings management?