IT IS DEFINITELY UNETHICAL TO MANIPULATE FINANCIAL STATEMENTS, BUT MAYBE IT IS LESS UNETHICAL AND BETTER, THAN REAL MANIPULATION

Abstract

The accounting-based earnings manipulation involves choosing appropriate accounting methods to reach desired levels of earnings, while the real activities earnings manipulation uses the timing and/or magnitude of operating decisions to reach desired earnings. The accounting bodies FASB and IASB have put a lot of effort in preventing the former during the last decades but there is probably no doubt that both kinds of manipulation are unethical.
Rigid accounting standards prohibit companies from letting management include some private information when the financial consequences of business activities are disclosed, which prevent accounting manipulation. But when management has strong motives, rigid accounting standards animate real manipulation.
By presenting simplified versions of real-world case study examples reflecting different subjects, we demonstrate that the long term consequences are always worse for the investor, when real manipulation is used rather than accounting manipulation.
Instead, increased transparency would be helpful for the investor to determine if there has been exercised accounting manipulation or not. But it remains to be decided whether some accounting manipulation is acceptable, despite it is clearly unethical.