The vagueness and subjectivity of Accounting standards led to the situation there is accounting choices that needed professional judgement. Healy and Whalen define earning management as “managers implement personal judgement in financial reporting to manipulate the financial report to mislead stakeholders (i.e.
investors) about a company’s underlying financial performance or to influence contractual outcomes that rely on the numbers reported.” (Healy & Wahlen, 1999) In Australia, AUS 210 “The Auditor’s Responsibility to Consider Fraud in an Audit of a Financial Report” describes fraudulent financial reporting as “intentional act by one or more individuals among management, involving use of deception to obtain an unfair or illegal advantage.” Fraudulent financial reporting involves intentional misstatements including omissions of amounts or disclosures in the financial report to deceive financial report users. Under AUS 210 explains that earnings management practices may start out small, but the pressures and incentives can heighten these actions, resulting in fraudulent financial reporting.
