L03 03-59. Ethics and Governance: Earnings Management Companies are aware that analysts focus on profitability in evaluating financial performance. Managers have historically utilized a number of methods to improve reported profitabil ity that are cosmetic in nature and do not affect " real" operating performance. These methods are subsumed under the general heading of

"earnings management." Justification for such actions typically includes the fo llowing arguments:

• Increasing stock price by managing earnings benefits stockholders; thus, no one is hurt by these actions.

• Earnings management is a temporary fix; such actions will be c urtai led 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 stockholders?

d. What governance structure can you e nvision that might inhibit earnings management?