Discuss about the Earnings Management Practices in Woolworths Group.
The accounting scandals and frauds over the past two decades have resulted in a debate associated with the financial reporting systems and their incapability in detecting fabrication of earnings. For instance, the accounting scandals of Enron, Xerox and WorldCom have exposed serious gap in the practices of financial reporting and audit system inadequacy (Kothari, Mizik and Roychowdhury 2015). The swindles occurred in the above-stated organisations have not been due to the accounting misstatements; instead, they occurred due to the prevalent earnings management practices of these organisations.
As commented by Fang, Huang and Karpoff (2015), earnings management could be described as the deliberate manipulation of the financial information on the part of managers to reach a targeted level of profits. In addition, such manipulation is conducted through the pliability of various accounting standards in selecting the method of accounting, its application and event timings. In the current era, the financial managers have resorted to earnings management for meeting or beating the market projections and expectations of the analysts.
The current research aims to provide a critical overview of the literature associated with earnings management. In addition, the research questions and hypotheses have been set along with the operational definitions and measurement. Finally, the research sheds light on discussing the research methodology with the expected outcomes of the research.
In the words of Ball (2013), the net profit or earning is a significant item in the financial statements, which helps in the decision-making process of the investors. It has been observed that the organisations are weighed down due to the market expectations of earnings. Any considerable earning departure from market projections could lead to adverse consequences for the stock price of the organisation and impair its endeavours of raising funds in future. For instance, in the research work of Badolato, Donelson and Ege (2014), emphasis has been placed on earnings; the business managers are interested in exercise and reporting selections for earnings of reporting. It has been found that earnings management has originated from the manager interventions in the process of financial reporting.
According to the research work of Chen, Cheng and Wang (2015), the purpose is to describe the motive to mange earnings by using the agency theory. It has been found that the conflict between the shareholders and managers is prevalent due to variation in goals and risk appetite. For minimising this conflict, the shareholders need to incentivise managers by relating the compensation with accounting earnings.
In the current era, the focus of earnings management has been amplified highly. The opaque practices of reporting and ineffective earnings quality could negatively influence the equity markets in the emerging nations. Thus, the current day organisations are engaged in adopting effective practices of earnings management to maintain the competitive edge and business sustainability.
The following research questions have been set to fit the purpose of the research:
The following research hypotheses have been framed based on the research topic:
H0: The association between the compensation of plan executive and coefficient of earnings response is negative
H1: The debt limit and coefficient of earnings response have negative relationship with each other
H2: The minimisation of the financial performance of executives and coefficient of earnings response has negative association with each other
The background of the research is simplified in order to make it achievable. The earnings management practices of Woolworths Group could be gauged in terms of compensation of plan executive, debt limit and coefficient of earnings response. Therefore, the researcher will use these variables to arrive at the outcome of the research. The scope of the research is limited to the evaluation of these variables and the degree to which the earnings management practices are affected on the part of these variables. The research excluded the consideration of the other Australian retail companies, which might help in revealing the industry trend. Therefore, Woolworths Group will be considered along with the above variables to test the research hypotheses.
Sampling serves as techniques in which targeted respondents are selected for research from a huge population. Probability sampling specifically simple random sampling will be employed in this research for carrying out survey with the financial managers of Woolworths Company as it offers equal chances to the respondents for being chosen within the survey. It has been gathered that quantitative evaluation requires larger sample size for gaining and evaluating responses gathered from survey participants. Simple random sampling will facilitate the research to select most important primary data source for blending relevant information that is aligned with research objectives (Flick 2015). Large sample size will be selected in this research for evaluating responses gathered from survey participants effectively. For this reason, 11 financial managers of Woolworths Company will be chosen to evaluate their responses.
The data gathered from the research on “Earnings Management Practices in Woolworths Group” will be analysed by means of employing several analytical methods. Considering the same, efficient selection of analytical methods is important to attain appropriate and suitable research findings. In addition to that, it facilitates sustaining transparency along with evaluating composed data. Quantitative data those are gathered will be analysed and represented through graphs and tables for simplifying the process of analysis for the collected data (Mackey and Gass 2015). Additionally, MS excel tool will be employed for converting the consumers opinion into certain percentage for anticipating the respondents insights trends.
Primary and secondary data will be gathered for evaluating the earnings management practices within Woolworths Company. Primary data for this research will be gathered from surveying 11 financial managers of Woolworth Company. Secondary data for this research will be gathered from relevant journals, previous research papers, books, articles and annul report of Woolworths Company. Quantitative data will be gathered for the recent research that will be analysed for gathering relevant information and research findings (Panneerselvam 2014). For collecting primary research, the researcher will develop a planned questionaries that encompass both close and open-ended questions. Survey will serve as the best option to collect relevant quantitative data as it facilitates collection of significant data from huge sample size.
Analysis of the research results will reveal existence of increased earnings manipulation within consumer durables and energy industry. The research will reveal that earnings management level in the upcoming years can improve the governance measures, audit along with financial reporting of Woolworths Company. The findings will also reveal that such measures can facilitate the company to be successful in constraining earnings manipulation along with making sure of the reliability of the reported numbers (Tarone et al. 2013). The research results are intended to reveal increased correlation among effective audit associations and decreased levels of earnings management in the Woolworth Company. The research results is intended to offer effective insights for regulators and Woolworth Company boards that will analyse the efficiency of the company’s boards along with enforcing effective governance measures. Research findings will reveal that such measures can retain earnings management that can after all safeguard investor interest.
Conclusion:
Probability sampling specifically simple random sampling will be employed in this research for carrying out survey with the financial managers of Woolworths Company. Simple random sampling will facilitate the research to select most important primary data source for blending relevant information that is aligned with research objectives. Quantitative data those are gathered will be analysed and represented through graphs and tables for simplifying the process of analysis for the collected data.
Primary and secondary data will be gathered for evaluating the earnings management practices within Woolworths Company. The research will reveal that earnings management level in the upcoming years can improve the governance measures, audit along with financial reporting of Woolworths Company.
References:
Badolato, P.G., Donelson, D.C. and Ege, M., 2014. Audit committee financial expertise and earnings management: The role of status. Journal of Accounting and Economics, 58(2), pp.208-230.
Ball, R., 2013. Accounting informs investors and earnings management is rife: Two questionable beliefs. Accounting Horizons, 27(4), pp.847-853.
Chen, X., Cheng, Q. and Wang, X., 2015. Does increased board independence reduce earnings management? Evidence from recent regulatory reforms. Review of Accounting Studies, 20(2), pp.899-933.
Fang, V.W., Huang, A.H. and Karpoff, J.M., 2015. Short selling and earnings management: A controlled experiment. The Journal of Finance.
Flick, U., 2015. Introducing research methodology: A beginner’s guide to doing a research project. Sage.
Kim, J.B. and Sohn, B.C., 2013. Real earnings management and cost of capital. Journal of Accounting and Public Policy, 32(6), pp.518-543.
Kothari, S.P., Mizik, N. and Roychowdhury, S., 2015. Managing for the moment: The role of earnings management via real activities versus accruals in SEO valuation. The Accounting Review, 91(2), pp.559-586.
Mackey, A. and Gass, S.M., 2015. Second language research: Methodology and design. Routledge.
Panneerselvam, R., 2014. Research methodology. PHI Learning Pvt. Ltd.
Tarone, E.E., Gass, S.M. and Cohen, A.D., 2013. Research methodology in second-language acquisition. Routledge.
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