LAW 122 Chapter Notes - Chapter 7: Accounting Scandals, Arthur Andersen, Kpmg
12 Oct 2017
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Chapter 7: earnings management and the quality of financial reporting. Enron, worldcomm and tyco were all involved in the use of inside information by top management to sell shares owned at a relatively favorable current price compared to future prices. Executives knew that the earnings had been manipulated and the bubble was about to burst. Managers acted illegally in violation of securities laws motivated by their own self-interest, classified as egotistic behavior motivated by self-interest. The rights theory calls for actions that are universally acceptable given an accepted standard of behavior and not actions motivated by an ends justifying means approach to decision making. An important quality of useful information is representational faithfulness, should be reported based on ethical substance. Maximizing bonuses, increase value of stock options, meeting investors" expectations, avoid consequences of debt covenants. Is it legal: some earnings management techniques are acceptable under gaap, others aren"t.
