Companies often try to keep accounting earnings growing at a relatively steady pace,
thereby avoiding large swings in earnings from period to period. They also try
to meet earnings targets. To do so, they use a variety of tactics. The simplest
way to control the timing of accounting revenues and costs, which all firms can
do to at least some extent. For example, if earnings are looking too low this
quarter, then some accounting costs can be deferred until next quarter. This
practice is called “earnings management”. It is common, and it raises
a lot of questions. Why do firms do it? Why are firms even allowed to do it
under GAAP? Is it ethical? What are the implications for cash flow and
shareholder wealth?
