Concepts of earnings management and transparency

Concepts of earnings management and transparency

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Earning management is the process and the techniques by which the profits of a company are effectively handled.  The earning management of the company is very important for the stakeholders.  If a company has good earnings, then the share prices would rise.  In the earning management, the company would purposefully adjust its earnings so that a pre-planned target is achieved.  This may be performed for several reasons including generating a smooth income. The process of generating a smooth income may in fact be very complicated.  The managers would purposefully adopt a strategy to mislead the investors, to make them think that the company is doing better than is actually, or to hide a certain amount of profits (Steven, 2006 & Investopedia, 2008). 

Transparency in earnings is the extent to which the company reveals the extent of the profits or the losses gained or suffered by the business.  Transparency also includes revelation of the various business processes, techniques, problems suffered, decisions-made, issues, etc, of the business.  A company with greater transparency in its financial issues would report greater income in certain circumstances and lesser income in other circumstances.  A company that is less transparent to the stakeholders would become vary obvious to the stakeholders, and in a crisis situation may have damaging consequences.  Hence, the managers have to be transparent only in certain issues (Hunton et al, 2006).

In an effort to reduce the ever-rising costs of healthcare, greater transparency in medical billing services is required.  This would not only be useful to the patient in reducing the costs, but also to the insurance companies to help reducing the costs of claims.  The Senate brought about a Bill proposal called ‘Bill 138’ in order to prevent medical transparency in bill practices.  Critics say that if this bill is passed, then it would be very difficult for the consumers and the insurance companies to identify the costs comprehensively, thus making medical care even more costly.  Besides, critics say that having reduced transparency in medical billing practices could have a serious impact on the quality of the services.  Lesser amount of transparency could also affect the competition in the healthcare sector (Mook, 2008).

References:

Hunton, J. E. et al (2006). “Financial Reporting Transparency and Earnings Management.” The Accounting Review, 81(1). http://www.atypon-link.com/AAA/doi/abs/10.2308/accr.2006.81.1.135?cookieSet=1&journalCode=accr

Investopedia (2008). “What is earnings management?” Retrieved on March 18, 2008, from Investopedia Web site: http://www.investopedia.com/ask/answers/191.asp

Mintz, S. (2006). “Earnings Management: Causes, Techniques, and Transparent Financial Reporting.” Retrieved on March 18, 2008, from Case Place Web site: http://www.caseplace.org/collections/collections_show.htm?doc_id=360711

Mook, B. (2008). “Senate committee holds hearing on 'medical transparency' proposal.” Retrieved on March 18, 2008, from Biz Jounrals Web site: http://www.bizjournals.com/denver/stories/2008/02/04/daily61.html

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