Explain the terms creative accounting and earnings management. Explain the motivations for managers to manage earnings from the viewpoint of contractual, market and political cost incentives. Discuss four suggestions on limiting creative accounting and earnings management practices. 3

Answer:-

1. Creative accounting and Earnings management:-

Creative accounting:- Creative accounting consists of financial activities that meet the rules and regulations necessary but deviate from what such principles aim to do. Creative accounting capitalizes on gaps in accounting principles in order to unfairly present a better picture of the business. While innovative accounting activities are legal, the gaps they manipulate are also reformed to discourage such actions from happening.

Earnings management:- Earnings management is the use of financial methods to generate financial statements that give an excessively optimistic perception of the company's corporate operations and financial status. Often accounting rules and guidelines enable the management of a business to make decisions in compliance with these principles. Earnings Management needs to take advantage of the manner in which accounting rules are enforced and produces financial statements that inflate.