Earnings Management
The innovative methods that firms or banks use to report their economic performance in order to misguide the stakeholders or some of them arereferred as earnings management. Earnings management is a practice that is carriedout by a person from inside the organization in order to leave some influence on the contractual outcomes as well.In banks, insiders sometimes overstate true earnings leveraging their strengths and experience in financial reporting and do not allow the unfavorable earnings to come forward.
These inaccurate practices form the insiders do not allow the outsiders to govern the origination firmly as their control is weakened. The major reason for reporting conflicting incentives to show lower earnings is the benefit that regulators attain economically. Earnings management is valuable in the banking sector, especially as they receive special incentives forreporting low earnings.
Banking Sector Overview
The traditional method of banking only involvesaccepting deposits and allowing the public to lend money from the banks that arereferred as the traditional streams. However, this concept of banking has changed decades ago and the modern banking is way above these factors. The banking sector has relied on these streams for decades, but now they are looking ahead and searching for new means of earning.
In doing so there are some new sources of earnings have emerged or got prominence that includesbrokerages, commissions, and profits through investments.The competition in the banking sector is increasing which is persuading the banks to innovate and introduce less complex products.
The banks are in search of new methods or channels of deliveries and are compelling to adapt these new channels. Besides that, the focus of the banking sector is also directed towards the business processes as they are investing huge capital in these processes. In order to increase the profitability, the banking sector requires effective and efficient management as the survival of the sector is on profitability.
However, the unique positioning of the banks creates some bottlenecks that hinder the process of attaining normal profits. Through research it has been identified that banks are facing critical challenges in attaining even normal profits. Form studies different methods or constraints are identified that creates trouble for the banks and restrict them from attaining profits.
The first major constraint occursfrom the respective governments as around the globe banks does not operate freely and are controlled or govern by the governments. The governments utilize banks to facilitate the projects that are directed towards national objectives that include projects related to education, health care and rural development.
This restriction or governance creates hinders in the profitability of the banks.The commodity in which the banks deal is money and the transaction involving this commodity are clicks to handle. The reason for this complexity is the risk that is involved in transacting this commodity as it is very high as compared to other businesses.
On the other hand, additional investment is required to implement efficient and specialized risk management techniquesin order to manage the complex banking operations. The implementation of Basel II has restricted the banks to shore up capital resources,thus, the banks are restricted in terms of their capital requirements.
On the other hand, some other reasons that have been identified that create barriers for banks in achieving profitability include customers. The banking sector is an industry where the loyalty from the customer’s end is very low. The expectationsof the customers are always high as they require or seek efficient service delivery.
However, they are not regarded or shown any loyalty and the factor of customer loyalty is missing in this industry. The interest spread is strained or restricted by the interest rates that are growing rapidly and the banks requires innovative products and services to cater clients.
As stated, the demands and expectations of the clients are increasing which is why the need of efficient and innovative products and services is increasing. Providing new and innovative products is a challenge as it requires attaining economies of scale which is a challenging task in the banking sector.
Banking and Reporting Case Solution
Earnings Management in Banking Sector
The banking sector is one of the most significant industries that is practicing earnings management or focusing towards managing their earnings. In a study regarding the topic it has been identified that in the majority of the countries, banks are practicing this activity of managing their earnings.
The sample size of the study was 48 that revealed that two-third of the countries are allowing banks to manage their earnings. It has been identified through the research that banks that are practicing high earnings are able to create a positive relationship between the returns and the risks. ............
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