Case Study On The Relationship Between Financial Instruments And Earning Management

Research on earnings management, as well as research on banks, has always been a hot issue in accounting and finance field. Compared with them, banks’ business is very special thus the governance of banks is very different in many aspects. Also, the banks’earnings management is different from manufacturing enterprises. It is significant to research on banks’earnings management due to banks’ uniqueness.Commercial banks possess a large quantity of financial instruments. As the accounting treatment of financial instruments is difficult and different, so how to measure them will have a significant influence on earning of banks. Because accounting principle in China is not perfect, there are enough room for commercial banks in China to control earnings.This paper firstly summarizes previous studies to explain the relevant theoretical basis. This paper shows the relationship between financial instruments and earning management by analyzing the statistics of commercial banks and in the last part shows a selected cases. In conclusion, it is implied that commercial banks in China tend to use financial instruments to manage earnings and financial instruments do have impact on earnings. Accounting principle in China need to be upgraded in order to reduce the room for earnings management.