Earnings Management Indicators and Their Impact on Inventory Turnover under Food, Beverage and Tobacco Sector: A Thorough Study Using Simultaneous Equations Model
INTRODUCTION Capital, resources, extensive and successful risk based management are common denominators among successful entrepreneurs such as Howard Schultz and Donald Trump. These things, however, can be best equated and explained by Peter F. Drucker's famous quote: "Whenever you see a successful business, someone once made a courageous decision" Their businesses started by another common denominator a right amount of courage used at the right time, a pint of courage to return a million dollar profits. Just as how subtle business decisions may be, as exhibited by choices which appear to be simple, such as make or buy and invest or divest, these decisions are also becoming increasingly critical in nature. A simple decision can make one an instant billionaire, but a tip of the balance may mean a chance of losing large profits. Hence, all business decisions should be well informed and based on reliable and relevant data in order to ensure profits and mitigate risks to an acceptable level. Information processing and reporting financial data that is relevant and reliable to users of financial statements is the primary purpose of accounting. These accounting standards are generally based on objective judgment. However, several accounting standards allow management to exercise its discretion to report a certain account based on their own set of assumptions. More often, this discretion results into recognizing accruals thus, leading to the term discretionary accruals. It is a common knowledge among people that are well versed in accounting that recognition of accruals affects the balance sheet and the income statement. Recognition of accruals affect the assets and liabilities as well and the profit and loss accounts. This should be viewed as a critical factor which raises flags on the possible repercussions brought by judgment of management. Needless to say, rationally, they have the motivation to increase earnings reported in the financial statements, making these accruals become subjective by nature. The big question is, will this discretion handed to management undermine the value of financial statements particularly on inventory turnover. RELATED LITERATURE, STUDIES AND THEORETICAL FRAMEWORK Earnings management usually derives an unfavorable reputation as it can often be perceived as "cooking the books" or in other words, altering financial statement figures just to achieve a more favorable disposition in front of potential investors, creditors and other parties interested or currently engaging with the entity. Roychowdhury (2006) reinforces this idea made in reference to Healy and Whalen (1999) He said that "Earnings management occurs when managers use judgment in financial reporting and in structuring transactions to alter financial reports to either mislead some stakeholders about the underlying economic performance of the company or to influence contractual outcomes that depend on reported accounting practices." The above claims refer to the manipulation of earnings through accounting estimates, yet another method at which earnings management is manifested is through operational decisions made by management known as real activities manipulation. It is defined as "departures from normal operational practices, motivated by managers' desire to mislead at least some stakeholders into believing certain financial reporting goals have been met in the normal course of operations" (Roychowdury, 2006) "Virtually, all management activities have the potential to affect earnings, and so constitutes earnings management" (Public Oversight Board, 2002) Earnings management is often associated with productivity whereby forecasts for sales and profitability are derived and maximize the use of resources to achieve the said forecasts. In a more technical sense, it is a known fact that managing earnings is inherent with how the organization manages its resources to ensure its effective and efficient use.