Earnings management and fraud

The purpose of the chapter is to provide a rounded discussion of the concept of earnings management and theories underpinning this behavior. The chapter presents an overview of the concept, with a discussion of alternative definitions and the theories related to this behavior, including the commonly discussed agency theory as well as some less-researched theories such as socioemotional wealth theory and upper echelons theory. The chapter also presents incentives that can lead to this behavior and evidence in the academic literature, followed by some examples in developed and developing countries of earnings management that spilled into fraud. The chapter concludes with a summary and some potential extensions to the academic literature