Ethics and Earnings Management (Video) (Course Id 1913)

• Who is this course for?
  Designed for anyone needing Continuing Professional Education (CPE), particularly CPAs, auditors, and financial statement preparers interested in the ethical dimensions of financial reporting.

• What is this course about or what problem does this course solve?
  It examines the ethics behind "managing" earnings—using legitimate discretion in financial reporting in ways that may serve managers' interests rather than those of the owners. The course builds an ethical framework grounded in professional codes, then explores real-world instances of earnings management through that lens.

• How can the knowledge from this course be used?
  Learners can critically evaluate earnings management practices by applying the ethical principles established at the course's outset, distinguishing acceptable discretion from manipulative reporting—even when within GAAP boundaries.

• Why is this course important to a CPA, Accountant, or IRS Enrolled Agent?
  Earnings management, while often legal, raises ethical concerns and can undermine trust in reported results—impacting audit judgment or stakeholder reliance. Understanding both the "what" and the "why" of such practices—through an ethical lens—enables professionals to make more informed assessments and decisions.

• When is this course relevant or timely?
  Released in 2021 and revised on March 1, 2024, the course remains highly current, keeping pace with evolving expectations around ethical decision-making and the responsible use of professional judgment in financial reporting.

• How is a course like this consumed or used?
  Delivered via NASBA QAS self-study (video and text), the course includes 3 pages of content, 11 review questions, and a 15-question final exam, offering 3.0 CPE credits upon successful completion.

This 3.0 credit course tackles the question: Is it ethical to “manage” the earnings number – that is, to use legitimate discretion in the preparation of the financial statements to manage the numbers in a way that serves the interests of the manager independent of whether it serves the interest of the firm’s owners? We begin by creating an ethical framework based on the professional code of ethics. We then cover the what, why, how and when of earnings management behavior, describing and illustrating the variety of ways in which managers use their discretion in operating, investing, financing, and reporting decisions to influence the financial reports. In the vast majority of these cases, we rely on real-world examples, taken from publicly-available financial statements that received unqualified audit opinions. For the various categories of earnings management, we consider how they can be evaluated within the ethical framework we established in the beginning of the course. The result is an informed and thoughtful approach to assessing whether a given earnings management practice is consistent with professional ethics, a valuable tool whether you are an external auditor reviewing a set of statements, a preparer of the statements, or an outsider attempting to determine the usefulness of the statements.

Video - NASBA QAS - Text - NASBA Registry - 1913

Course Learning Objectives

1. Describe the major elements of the accounting professional code of ethics.
2. Define earnings management and link it to the elements of the code of ethics.
3. Explain why earnings management is practiced.
4. List and describe the two basic forms of earnings management: real and reporting.
5. Identify common situations when earnings management is practiced.

Chapter 1 - Ethics and Earnings Management

Chapter 1 Review Questions

Glossary