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The Ethics of Earnings Management: Perceptions after Sarbanes-Oxley
In the 1980s, the ethics of financial reporting led to a major increase in business failures
and fraudulent financial reporting. This led to the creation of the National Commission of
Fraudulent Financial Reporting. This was also known as Treadway Commission; Fraudulent
Financial Reporting was defined as intentional or reckless conduct, it results as a mislead on
financial statements (Grasso, Tilley & White 2009). In 2000, flurry of accounting scandals received
public attention due to the accounting practice and financial reporting that led a collapse of
the market technology stocks. Due to those scandals the Sarbanes-Oxley Act of 2002 (SOX) was
passed, this was to hold top managers more carefully accountable for their firms’ financial
reporting (Grasso et al, 2009).
When managers and accountants are involved in fraudulent financial reporting this
happens by the practice of earning management. Earning management behavior has been
