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One of the reasons accounting earnings may not be a realistic measure of economic income is the incentive structure and the ability of business managers

One of the reasons accounting earnings may not be a realistic measure of economic income is the incentive structure and the ability of business managers to manipulate reported profits for their own benefit. This may be particularly true when their company has an incentive compensation plan that is linked to reported net income.

Net income is often used as a performance indicator in compensation contracts. Net income can however be managed. Why might a CEO manage earnings? (5 marks)

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