What are Managed Earnings?

Managed earnings occur when the managers of a business falsely manipulate reported profit levels. The manipulation is usually designed to increase profits, perhaps to improve the stock price of the business or to qualify it for a loan. Earnings may also be adjusted downward in order to reduce the tax burden of the business.

How to Manage Earnings

Earnings can be managed in many ways, such as by accelerating or deferring revenue recognition, adjusting expense reserves, and capitalizing expenses. Reporting revenue earlier than it should be recognized increases reported revenue levels in the current reporting period, but reduces revenues in the period when the revenue would have been reported. A deferral of revenues shifts revenue out of the current period and into a later period. An adjustment to an expense reserve can reduce the amount charged to expense in the current period, thereby increasing profits. Conversely, an increase in an expense reserve increases the amount charged to expense in the current period, thereby reducing profits. The capitalization of an expense reduces expenses by the amount capitalized in the current period, and replaces it with a gradual charge to depreciation over multiple subsequent reporting periods.