Earnings management occurs when managers use judgement in financial reporting and in structuring transactions to alter financial reports to either mislead some stakeholders about the underlying economic performance of the company or to influence contractual outcomes that depend on reported accounting practices. A number of studies discuss the possibility that managerial intervention in the reporting process can occur not only via accounting estimates and methods, but also through operational decisions.

(Healy & Wahlen, 1999).

REQUIRED:

1. Explain the different between accrual and real earnings management. AND provide an example of each.

(b)       In 2016, most of the companies in the Bursa Malaysia faced economic problems in terms of high production cost. Under this situation:

(i)         Identify the possible earning management strategy that can be considered taken by the company.

(ii)        Provide a reason for the strategy taken.

(iii)       Explain the financial effect of the chosen strategy on the companies.

3. Discuss whether activities of earnings management are consistent or not with the securities market efficiency theory.

4. Explain FOUR (4) reasons for shareholders to monitor managers’ activities, and provide THREE (3) agency costs incurred by the shareholders in a company.