Reference no: EM133090683

The Bank Management assignment is a Group project requiring teams to report on Earnings Management (EM). Accounting standards allow bank managers discretion to set accruals. For banks, the two main accruals are loan loss provisions and realised securities gains and losses. Both items reside in banks' income statement or profit and loss account. By applying discretion, bank managers can manage earnings either by under or over stating accrualsfor either strategic, opportunistic, or potentially unethical reasons. Indeed, bank management has been accused of intentionally and unethically using complex financial instruments to obfuscate banks' financial statements. It is suggested that the management of troubled banks perceive financial distress as a temporary situation to be concealed through earnings management (EM) until bank performance improves. Other evidence finds that firms entering bankruptcy were three times more likely to face actions relating to suspected financial statement fraud. Obfuscation whether intentional or unintentional makes it harder for regulators, creditors, and stakeholders to accurately assess banks' financial condition. The empirical record on EM in banking shows bank managers have used EM to smooth earnings and manage banks' regulatory capital, avoid losses, signal private information about banks' prospects and/or take bigger baths, reduce tax liabilities, and increase executive pay. Increasing the opacity of banks' financial statements raises doubts about the quality of financial reporting as EM can obscure the nature of banks' risk-taking. This is concerning for institutions like central banks because of links between bank risk-taking (and performance) and financial stability/the real economy. Worryingly, EM behaviour shows little sign of abating.

1. Presentation of empirical frameworks which show how researchers can establish whether managers are using Earning Management and frameworks for testing the capital management hypotheses, signalling hypothesis, income smoothing hypothesis.