Earning management and cookie jar.

There are various business ethics as well as rules and regulations, which are compulsorily to be followed by every business organization. Many of these rules aim to protect the interest of the customers. Any trade practice that is against the ethics, will lead to legal proceedings and penalties. As per the various sections under the Consumer Protection Act, these entities can be punished if they breach any laws and bring harm to the customers.

Earnings management can be defined as “a purposeful intervention in the external financial reporting process, with the intent of obtaining some private gain”. (Earnings Management Incentive and Techniques, n.d)

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Instead of doing business in a proper and sincere way, sometimes the management team may be forced to carry out business illegally due to various reasons. This is due to the fact that human beings are always keen on finding shortcuts for every task and, therefore, they always prefer these types of extreme earning management techniques. The common extra earning techniques followed are “cookie jar reserve technique, big bath techniques, big bet on the future technique, flushing,” (Popular Earning Management Techniques, n.d) stuffing the channel etc.

In cookie jar reserve, the accounting rule GAAP is not followed properly. Here the profits made in the current year are used to cover for losses made in some other year, in order to ensure the profitability of the firm by meeting its margin. Big bath is used by companies when stiff competition arises, the company will plan on “restructuring” (Popular Earning Management Techniques, n.d.) the existing system and policies. Then, instead of recording the cost of such changes made in the organization, this loss is “reported as a non-recurring charge against income” (Popular Earning Management Techniques, n.d.).

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