Earnings management relates to the use of discretionary accounting accruals to manipulate reported earnings figures (Schipper, 1989, pp. 92–93; Jones, 1991, p. 206). Further, Watts and Zimmerman (1986, pp. 230–231) argue that, because corporations are particularly vulnerable to wealth-extracting political transfers in the form of legislation and/or regulation, companies may use earnings management to decrease net income in periods of increased political sensitivity. In support of this claim, recently published research (Deegan and Rankin, 1996; Patten, 2000, 2002) reports evidence indicating corporations appear to use environmental disclosure to offset negative environmental performance.

Required:

(a) Discuss how earnings management is used as a tool to reduce sensitivity to political pressure. In support of this claim, recently published research (Deegan and Rankin, 1996; Patten, 2000,

(b) Regulators may impose political costs on firms. However, there are ways that some firms practice to minimize such costs. Discuss with examples.