A Research On Earnings Management Of Small And Medium Enterprises In Hong Kong

This research employs surveys with the use of questionnaire, interviewing loans managers, accounting officers and practicing accountants of their views on the behaviours relating to earnings management of small and medium enterprises in Hong Kong, so as to understand their motives for earnings management and the practices adopted under different motives. In addition, case investigations are carried out for individual small and medium enterprises to study the behaviours in earnings management by analyzing their different financial ratios and other factors.The present research covers both manipulated practices and managed practices employed for earnings management. This research reveals that small and medium enterprises would adopt not only these practices that comply with the accounting standards and also these illegal and non-regulation practices to achieve their target earnings level. These manipulated practices are uneasily to detect.Results of the questionnaires indicate that "avoiding tax" and "obtaining bank credits" are top motives of earnings management. "Avoiding fluctuation of earnings" and "fulfill the requirement of listing" rank next. Methods employed in earnings management include: control timing of recording in accounts, related party transaction and other income being classified as sales revenues. Analysis find that the motive to avoid tax would adopt to methods such as control timing of recording in accounts, hidden income, manipulating cost of sales, expensing off capitalized expenditure, controlling salaries and wages expenses level; the methods mainly adopted for obtaining bank credits are falsified income, making use of related party transaction, control timing of recording in accounts and other income being classified as sales revenues. Different motives of earnings management employed different methods.This research deducts motives and methods of earnings management by scrutinizing the indicated symptoms after investigating the cases by interviews, in-person observation with use of financial ratios, cash indicators.The research concludes that the financial reports of small and medium enterprises in Hong Kong are not reliable. The user of financial statements must consider other information available in order to justify the reliability of the financial statements and the...