All firms tend to manage their earnings to some extent via the accrual process. This is acceptable insofar as it helps provide a better view of the company. Student A proposes that earnings management is detrimental and misleading and should be reduced as much as possible. Student B argues that earnings management (up to a certain level) is necessary in order to allow managers to convey information via the accruals. Earnings play a significant role in the market as provide useful insight for stakeholders such as investors, banks and the government into a company's performance Jones defines earnings management as utilising the flexibility within the regulatory framework to manage the measure and presentation of accounts so that they give priority to the interests of the preparers and not the users. Additionally, McKee defines earning management as the reasonable and legal management decision making and reporting intended to achieve stable and predictable financial results. It is suggested that all firms, to a degree, manage their earnings. Earnings management frequently occurs via the accrual process as it takes more effort to manipulate earnings through the cash flow component. Firms manage their earning by increasing income through premature recognition of sales, decrease expensive by reducing provisioning and increase assets by lengthening useful life of depreciation. There are several reasons as to why companies opt to management their earnings. As would be expected, managers are enticed to manipulate earning to obtain their bonuses or to portray the company as having achieved the earnings forecast. Research shows that companies were found to income smooth - that is beef up profits in slow years and decrease earnings in good years. This serves to give the company a more consistent growth trend to attract investors. When new management takes over there is evidence of 'taking a bath' where a firm takes a hit to the books now to appear more profitable in future. However, this practice is detrimental to information users and does no more than mislead users of a company's true performance status. Investors depend on earnings information to make decisions regarding the provision of valuable resources. Due to the uncertainty of the future, investors can't accurately assess risks and make educated decisions if they are not presented with truthful information. If investors are to make decisions dependent on distorted earnings information they will ultimately act to their detriment. It is therefore evident that earnings management is a practise for the benefit of the firm and misleads users to their detriment. Although it would be unrealistic to eliminate earnings management altogether, this process should be avoided where possible.