Two ways that management could manipulate earnings would be to :
- Recording Revenue Prematurely: Management may book revenue that isn`t realized in the audit period by stating it as accrued. This could be eliminated by actually recording inventory as it comes and not prematurely.
- Recording Fictitious Revenue: Management may book revenue that is never actually realizable to show improved financial condition.
The timing of the recognition of revenue is the most likely area to target for management and manipulation. From an operational standpoint, firms can take aggressive actions to boost revenues and sales in one period through providing incentives to their sales force, utilize overtime to push shipments out the door. They may also take aggressive accounting actions such as selling securities classified held for sales recognize gains in income versus stockholders equity, aggressive in the timing of the recognition of sales or aggressive in the application of broad or unclear accounting guidance.