As authors of the March article, “Is Managing Earnings Ethically Acceptable?,” we wish to thank Alfred M. King for his letter in the April issue questioning some of the contentions in our article. In a time when corruption seems to be rampant in many aspects of our national life, it is important for accountants to discuss openly what are their ethical responsibilities, and what are the limits to those responsibilities. The credibility of accounting numbers is vital to our success as a profession and as individual accountants. There will be no demand for accounting service if accounting information is not trusted by users.
Accountants have incorporated into their ethical codes the obligation to present information fairly and in an undistorted manner. Mr. King must have misunderstood our definition of earnings management As we stated, earnings management includes the actions of a manager that serve to change current reported earnings without generating a corresponding change in the long-run economic profitability of the unit. Managers who change earnings in this way are trying to influence positively the perceptions of their unit by users of the earnings numbers when there have not been any changes in the operation of that unit to warrant it. This is manipulative and unethical. How can anyone question this?
Mr. King seems especially concerned about whether earnings management can come about through operating decisions. For example, how can the selling of excess assets be bad? We do not question whether it is good or bad to sell off excess assets; we question the timing of that decision by management during periods when earnings need to be enhanced or reduced. When the timing of the operating transaction is selected to influence earnings rather than for valid operational reasons, the earnings are distorted and users' interests may be damaged. (Download for full text of letter.)
Available at: http://works.bepress.com/kenneth_rosenzweig/9/