A mission statement is a statement of the purpose of a company,

organization or person, its reason for existing.

The mission statement should guide the actions of the organization, spell out
its overall goal, provide a path, and guide decision-making. It provides "the
framework or context within which the company's strategies are formulated."
It's like a goal for what the company wants to do for the world.
[1]

According to Bart,
[2]
the commercial mission statement consists of three
essential components:
1. Key market: Who is your target client or customer (generalize if
needed)?
2. Contribution: What product or service do you provide to that client?
3. Distinction: What makes your product or service unique, so that the
client would choose you?
http://en.wikipedia.org/wiki/Mission_statement

IMPORTANCE OF
WHAT IS VISION The vision sets out what the organization wants to
accomplish It should inspire members, staff and supporters. A vision
statement may describeWhat difference would the activities would do
to the society as a whole How the organization wants to be seen by
society as a wholeIt defines the purpose of existence for a particular
entity/organization
WHAT IS MISSION STATEMENT?Mission typically describes the
manner in which an organization achieves its vision The vision is
described more in an idealistic form A mission statement is described
more in a practical aspects of what the organization would actually be
doing A good mission statement is concise, precise and encompasses
all its stakeholders
WHAT ARE VALUES? Values may be Beliefs Guidelines or rules
Code of conduct Values are be essential to provide guidance for
behaviour to provide direction in decision making, andto provide
guidance in planning strategy and setting direction for the future
TRICKLE DOWN Who are We - Values Ethic, Principal, Beliefs
Vision Why are we here What do we do or intend to Mission
doStrategic Goals When do we do it Tactics How do we do it
SUMMATION Vision, mission and values are important elements of
any organizations strategic planningFor the smooth functioning of the
organization it should be communicated across the organization and
also to all the stakeholders
VISION STATEMENTGinger is a fresh and warm experience of
unsurpassed value.
MISSION STATEMENTWe provide smart, clean and safe hospitality
offerings by adopting next-practices that constantly enhance value for
our Patrons.We are driven by respect for people and nature and passion
for our Stakeholders.
VALUES1 Customer - driven We anticipate expectations and delight
our Patrons with convenient and modern Excellence facilities at an
unsurpassed value.2 Entrepreneurship We strive to take ownership of
the tasks we perform and to create an environment that encourages and
supports initiative and appropriate risk-taking.3 Innovation We believe
that making meaningful changes to improve products, services and
processes to create value for all Stakeholders, is an integral part of the
daily work of the organization.4 Valuing Employees, We believe in
nurturing and developing internal and external partnerships, Partners &
balancing the growth of the core business while preserving natural
resources and Communities contributing to society5 Speed and Agility
We deliver on promises with a sense of urgency and short response
time.6 Fun, Joy and Zing We believe that a Happy employee leads to a
delighted Guest.

MISSION STATEMENTS: IMPORTANCE, CHALLENGE, AND
RECOMMENDATIONS FOR DEVELOPMENT (Abridged)
Source: Business Horizons, May/Jun92, Vol. 35 Issue 3, p34, 9p
Author(s): Ireland, Duane; Hitt, Michael A

Mission statements can help focus the organization on what really
matters--to itself as well as to its stakeholders. Mission
statements are important to organizations of all types (public,
private, not-for-profit, for-profit, family-owned, etc.). A key
reason for such importance is the mission statement's guidance of
strategic and day-to-day, operational decisions. Additionally,
mission statements represent the glue that binds organizations
together.
For example, Sears might improve its performance through
decisions guided by a new, more effective mission statement.
Sears' competitors have remodeled their old stores and
implemented strategies for entering new markets while Sears
struggles to "figure out what it wants to be" (Caminiti 1990), and
its buyers and customers remain confused "regarding the products
the company intends to stock" (Kelly and Zinn 1990). Thus, Sears'
current mission statement may not indicate the direction required
for effective strategic and operational decisions.
Grounded in the significance of mission statements, this article
seeks to 1) define and discuss their importance, 2) identify briefly
the significance of environmental challenges confronting many
organizations, 3) note that even in light of their importance,
mission statements have not been developed in many organizations,
4) examine factors that inhibit mission statement development,
and 5) offer recommendations that, if followed, increase the
probability of developing effective mission statements.
WHAT IS A MISSION STATEMENT AND WHY IS IT IMPORTANT?
An effective mission statement describes the firm's fundamental,
unique purpose. An important part of this description indicates
how a firm is unique in its scope of operations and its product or
service offerings. In simple yet powerful terms, a mission
statement proclaims corporate purpose. This proclamation
indicates what the organization intends to accomplish, identifies
the market(s) in which the firm intends to operate, and reflects
the philosophical premises that are to guide actions.
Mission statements are also intended to provide motivation,
general direction, an image of the company's character, and a
tone, or set of attitudes, through which actions are guided.
Furthermore, because mission statements embody a company's
soul, they are often inspirational.
Levi Strauss & Company's mission statement is described as
follows:
We seek profitable and responsible commercial success creating
and selling jeans and casual clothing. We seek this while offering
quality products and service -- and by being a leader in what we
do. What we do is important. How we do it is also important.
Here's how: By being honest. By being responsible citizens in
communities where we operate and in society in general. By having
a workplace that's safe and productive, where people work
together in teams, where they talk to each other openly, where
they're responsible for their actions, and where they can improve
their skills.

Thus, the firm has described its fundamental, unique purpose.
Additionally, the mission statement indicates what the company
intends to accomplish and describes the philosophical premises
that guide peoples' actions. Once completed, mission statements
become the foundation on which other intended actions are built.
Only after a mission statement has been developed can objectives
and appropriate strategies be formed properly.
The following part of the mission statement of Anheuser-Busch
Companies, Inc. demonstrates this point: "Anheuser-Busch's
corporate mission statement provides the foundation for strategic
planning for all subsidiaries."
Peter Drucker (1973) perhaps best described the general
relationship and sequence between a mission statement and
objectives. "A business is defined by the business mission. Only a
clear definition of the mission and purpose of the organization
makes possible clear and realistic business objectives."
TODAY'S COMPLEX ENVIRONMENTAL CHALLENGES
Today's challenges suggest the critical nature of effectively
articulated mission statements. Included among the challenges
confronting executives are:
1. complex and ambiguous decision conditions;
2. increasing levels of environmental turbulence and the difficulty
of managing it;
3. increasing intensity in global market battles;
4. increasing numbers of hostile takeovers and the sophistication
of manufacturing technologies; and
5. the need to constantly introduce high-quality, innovative
products and services.
These types of conditions clearly suggest the paramount
importance of effective mission statements.
A key outcome of mission statements is the determination of a
firm's focus when coping with complex environments.
"Setting a clear, realistic mission and then working tirelessly to
make sure everyone--from the chairman to the middle manager to
the hourly employee--understands it" (Henkoff 1990).
Home Depot, America's largest warehouse chain selling do-it-
yourself items, has remained focused. The company's CEO
suggested that although Home Depot may be able to sell many
products (including, for example, toys and food products), it has
avoided the temptation to do so. The reason for retaining Home
Depot's original focus is to prevent the customer from thinking
the company is anything other than what it is--a highly successful
purveyor of do-it-yourself products (Caminiti 1990).
The mission statement of Anheuser-Busch notes that "the
fundamental premise of the mission statement is that beer is and
always will be Anheuser-Busch's core business."
In reference to its mission, the Harley-Davidson company has
stressed that "instead of pandering to trends, we'll stick with
what got us here: remaining faithful to our heritage."
THE FAILURE TO DEVELOP MISSION STATEMENTS
Many organizations, however, have not formed essential direction-
setting statements. One researcher found that 59 percent of the
Chief Executive Officers of Business Weeks top 1,000 firms run
companies that do not have mission statements (David 1989).
Interestingly, some of these large firms had acquired other
companies to diversify their scope of operations beyond the
company's original core business or product areas.
Porter discovered that "on average, corporations divested more
than half of their acquisitions in new industries and more than 60
percent of their acquisitions in entirely new fields." As noted
previously, a mission statement is intended to provide a focus for
all firms' efforts, including those that have diversified through
acquiring other companies. Thus, it is possible that the lack of an
effective mission statement and the necessity of restructuring
have contributed to the number of divestitures that have
occurred recently in some large diversified firms. For example,
Chrysler Corporation's Lee Iacocca admitted that diversification
was his "big sin." He further suggested that diversification
siphoned management attention and resources from the critical
task of designing and manufacturing new, high-quality vehicles
(Ingrassia and Stertz 1990).
The results of failing to draft mission statements in small firms
mirror those in large companies. Researchers discovered that 20
percent of small firms that did not engage in any type of strategic
planning failed, while failures occurred in only 8 percent of the
companies engaging in sophisticated strategic planning (Sexton and
Van Auken 1985).
The evidence presented above suggests the following important
question: Why are mission statements not developed in all types of
organizations?
FACTORS INHIBITING THE DEVELOPMENT OF MISSION
STATEMENTS
Several factors may account for the failure to develop mission
statements. Here, we examine the following:
1) the number and diversity of organizational stakeholders;
2) the amount of work required to develop an effective mission
statement;
3) the tendency for some stakeholders to become comfortable
with a firm's current position (the status quo is viewed as being
acceptable or preferable);
4) the belief that mission statements may reveal too much
confidential, competitive information;
5) the controversy that can be created through development of a
mission statement;
6) the difficulty that can be encountered when key upper-level
personnel spend too much time on operational rather than
strategic issues;
7) the requirement to think as a "generalist," not as a "specialist,"
when developing a mission statement;
8) some individuals' desire for excessive amounts of organizational
autonomy; and
9) the historical formality of strategic planning processes
A Large and Diverse Set of Stakeholders
Most organizations serve many individuals and groups.
Stakeholders derive value from the firm's outputs; as such, they
want the organization to constantly increase its capabilities of
satisfying stakeholder interests and needs. The outcomes
achieved by today's profit-making corporations must be at least
satisfactory to the following stakeholders: shareholders, capital
markets, customers, suppliers, various governmental agencies (at
the national, state, and local levels), and the communities in which
the organization operates (including the host countries in which a
multinational company conducts business).
Anheuser-Busch's mission statement indicates a clear concern
regarding a commitment to "quality and maintaining the highest
standards of honesty and integrity in its dealings with all
stakeholders."
Many more stakeholders today strongly vocalize their stake in an
organization's future. For example, when Roger Smith announced
his retirement as CEO of General Motors, representatives from
several pension funds (whose companies held GM stock) suggested
they should be active participants in the process to select Mr.
Smith's successor.
The Work Required to Develop an Effective Mission Statement
Preparing an effective mission statement is not accomplished
easily or quickly. Writing a mission statement is time consuming.
Each word must be selected carefully to ensure its consistency
with directions sought by all stakeholders.
Comfort With the Status Quo
Generally speaking, organizational structures are changed only
after a firm's performance declines. Executives (and others who
have a strong interest in the firm's success) may not recognize
the role a new mission statement or a change in the old one could
play in efforts to reverse a firm's performance.
Confidentiality
As indicated previously, a mission statement should describe, at a
minimum, how an organization is unique, what it desires to be. This
information provides valuable insights to various stakeholders. As
such, a mission statement appropriately reflects general
indicators of an organization's current and intended actions.
Some executives believe this type of information is confidential
and should not be available to many parties. However, detail is the
province of strategies and various types of plans, procedures, and
policies, not mission statements. A mission statement is meant to
be broad and to indicate only the general direction of intended
actions.
Mission Statements Can Be Controversial
Choices must be made in determining answers to the questions of
"who we are" and "what we intend to be." Generally speaking, each
possible direction is attractive to one or more stakeholders.
Alternative solutions should be evaluated openly and resolutions
formed. Thus, developing a mission statement yields an
opportunity to identify any stakeholder disagreements that could
exist within groups (among key managerial personnel, for example)
or between groups (between managerial personnel and a board of
directors).
Time Spent Dealing With Operational Matters
On occasion, those involved with key strategic organizational roles
can become embroiled in coping successfully with day-to-day,
operational problems. Upper-level managers may spend far more
time with tasks related to "getting the product out the door" than
with matters pertaining to the organization's long-term direction.
The Generalist Versus the Specialist
Initially, the skills of most managerial personnel are those of the
specialist. However, mission statement development requires the
primary use of general rather than specific technical skills; the
ability to think simultaneously about the interests of all
stakeholders -- those that are both internal and external to the
firm. When preparing a mission statement, managers, regardless
of initial training and type of technical expertise, are challenged
to concentrate on a general, integrative focus rather than the
more narrow view of a specialist.
The Pursuit of Organizational Autonomy
Even in an historical sense, America has been known as an
"entrepreneurial society" (Kaplan 1987). It may be difficult to gain
commitment from those who subscribe to this view of
entrepreneurial activity when attempting to form a mission
statement. The challenge for those responsible for developing
mission statements, then, is to determine and articulate the
legitimate role an entrepreneurial focus can play in forming and
implementing a mission statement.
Formality of Historical Strategic Planning Processes
Traditionally, strategic planning processes have been formal in
nature. The first objectives of the strategic planning process is to
develop an effective mission statement. However, more formal
strategic planning processes often reduce the number of people
associated with this activity. To be successful, many people should
be involved with the development of a mission statement.
Managers therefore are challenged to identify processes that will
encourage and facilitate the active involvement of many people
when developing mission statements, strategies, and plans.
RECOMMENDATIONS FOR DEVELOPING EFFECTIVE MISSION
STATEMENTS
Each organization has unique internal capabilities and external
opportunities. This should be recognized when developing unique
mission statements. The recommendations presented below can be
used effectively across many organizations.
Support from Top-Level Managers
Effective mission statements yield general indicators regarding
what an organization intends to be, whom it intends to serve, and
the philosophies and values that will guide its strategic and
operational decision making processes. Top-level managers must
accept responsibility for articulating a mission in ways that are
meaningful for each stakeholder group. Mission statements should
be formed only when top-level managers have made the
philosophical and operational commitment required to focus the
organization's resources on mission accomplishment.
Mission Statement Complexity
Previously, task complexity was shown to inhibit mission statement
development. As such, those who select the process to form (or
reshape) a mission statement should recognize that it may require
a complex reorientation of the firm.
The Need for Transformational Leadership
Transformational leaders inspire, energize, and intellectually
stimulate and stir employees to look beyond their own self-
interest for the benefit of individual work groups and the
organization as a whole. Typically, such leaders are seen as
charismatic and capable of providing individualized consideration
to stakeholders in efforts to satisfy their unique interests and
needs. Because of the "generalized" nature of mission statements,
a transformational leader may be necessary to marshal the
support (from a diverse group of stakeholders) required to
effectively implement a mission statement and to share the vision
it embodies.
The Consistency of Mission Statement Guidance
Andrew Grove, Intel's CEO, believes that a mission statement is
valuable when it is "used as a constant guide for the actions of
managers and workers." In Grove's view, the acid test of a
statement's effectiveness is how well it helps individuals
accomplish their jobs (Henkoff 1990).
Intel's current mission of becoming the premier building block
supplier to the computer industry is used constantly as the
foundation for decisions and resource commitments. It is the
responsibility of key individuals to verify that once formed, a
mission statement is used consistently as a guide for all
organizational decisions and actions.
Listening to Customers
It is generally agreed that organizations exist to satisfy
customers needs. In this sense, customers could be viewed as the
most critical stakeholder group and therefore should play a
prominent role in a mission statement's focus.
Conclusion
We have argued that mission statements provide critical direction
for all types of organizations. Failure to involve a broad range of
stakeholders in processes intended to determine an organization's
reason for being, those the organization intends to serve, and the
key philosophical premises that will guide decisions and actions
may contribute to poor performance. But mission statements have
not been developed in many organizations. We have examined nine
factors that may inhibit their formation. The challenge facing
managers today is to understand the criticality of mission
statements and to learn how to cope successfully with factors or
conditions that may prevent their development and revision. We
have also presented recommendations that, if followed, should
enhance managerial commitments to the development of mission
statements. In turn, developing effective mission statements can
contribute to increases in a firm's overall performance.

Strategic alliance
From Wikipedia, the free encyclopedia
Jump to: navigation, search
A strategic alliance is an agreement between two or more parties to pursue a set of agreed upon
objectives needed while remaining independent organizations. This form of cooperation lies
between Mergers & Acquisition M&A and organic growth.
Partners may provide the strategic alliance with resources such as products, distribution
channels, manufacturing capability, project funding, capital equipment, knowledge, expertise, or
intellectual property. The alliance is a cooperation or collaboration which aims for a synergy
where each partner hopes that the benefits from the alliance will be greater than those from
individual efforts. The alliance often involves technology transfer (access to knowledge and
expertise), economic specialization,
[1]
shared expenses and shared risk.
Contents
[hide]
Terminology[edit]
Various terms have been used to describe forms of strategic partnering. These include
international coalitions (Porter and Fuller, 1986), strategic networks (Jarillo, 1988) and, most
commonly, strategic alliances. Definitions are equally varied. An alliance may be seen as the
joining of forces and resources, for a specified or indefinite period, to achieve a common
objective.
There are seven general areas in which profit can be made from building alliances.
[2]

Typology[edit]
One typology of strategic alliances conceptualizes them as horizontal, vertical or inter-sectoral:
[3]

Horizontal strategic alliance: Strategic alliance characterized by the collaboration between two
or more firms in the same industry, e.g. the partnership between Sina Corp and Yahoo in order
to offer online auction services in China;
Vertical strategic alliances: Strategic alliance characterized by the collaboration between two or
more firms along the vertical chain, e.g. Caterpillar's provision of manufacturing services to Land
Rover;
Intersectoral strategic alliances: Strategic alliance characterized by the collaboration between
two or more firms neither in the same industry nor related through the vertical chain, e.g. the
cooperation of Toys "R" Us with McDonald's in Japan resulting in Toys "R" Us stores with built-in
McDonald's restaurants.
Another typology distinguishes between four forms of strategic alliances: joint venture, equity
strategic alliance, non-equity strategic alliance, and global strategic alliances:
Joint venture is a strategic alliance in which two or more firms create a legally independent
company to share some of their resources and capabilities to develop a competitive advantage.
Equity strategic alliance is an alliance in which two or more firms own different percentages of
the company they have formed by combining some of their resources and capabilities to create
a competitive advantage.
Non-equity strategic alliance is an alliance in which two or more firms develop a contractual-
relationship to share some of their unique resources and capabilities to create a competitive
advantage.
Global Strategic Alliances working partnerships between companies (often more than two)
across national boundaries and increasingly across industries, sometimes formed between
company and a foreign government, or among companies and governments.
Advantages/Disadvantages[edit]
Advantages[edit]
The advantages of forming a strategic alliance include:
Allowing each partner to concentrate on their competitive advantage.
Learning from partners and developing competencies that may be more widely exploited
elsewhere.
Adequate suitability of the resources and competencies of an organization for it to survive.
To reduce political risk while entering into a new market.
Disadvantages[edit]
Risk of losing control over proprietary information, especially regarding complex transactions
requiring extensive coordination and intensive information sharing.
Coordination difficulties due to informal cooperation settings and highly costly dispute
resolution.
Agency costs: As the benefit of monitoring the alliance's activities effectively is not fully
captured by any firm, a free rider problem arises (the free rider problem seems to be less
pronounced in settings with multiple strategic alliances due to reputational effects).
Influence costs because of the absence of a formal hierarchy and administration within the
strategic alliance.
Stages of Alliance Formation[edit]
A typical strategic alliance formation process involves these steps:
Strategy Development: Strategy development involves studying the alliances feasibility,
objectives and rationale, focusing on the major issues and challenges and development of
resource strategies for production, technology, and people. It requires aligning alliance
objectives with the overall corporate strategy.
Partner Assessment: Partner assessment involves analyzing a potential partners strengths and
weaknesses, creating strategies for accommodating all partners management styles, preparing
appropriate partner selection criteria, understanding a partners motives for joining the alliance
and addressing resource capability gaps that may exist for a partner.
Contract Negotiation: Contract negotiations involves determining whether all parties have
realistic objectives, forming high calibre negotiating teams, defining each partners contributions
and rewards as well as protect any proprietary information, addressing termination clauses,
penalties for poor performance, and highlighting the degree to which arbitration procedures are
clearly stated and understood.
Alliance Operation: Alliance operations involves addressing senior managements commitment,
finding the calibre of resources devoted to the alliance, linking of budgets and resources with
strategic priorities, measuring and rewarding alliance performance, and assessing the
performance and results of the alliance.
Alliance Termination: Alliance termination involves winding down the alliance, for instance
when its objectives have been met or cannot be met, or when a partner adjusts priorities or re-
allocates resources elsewhere.
Strategy Development[edit]
Features common to transactions that are natural candidates for strategic alliances are:
High impediments to comprehensive contracting resulting in a major degree of contract
incompleteness
High complexity minimizing the auxiliary potential of the body of law for resolving issues not
specified in the contract
Both allies have to invest in relationship-specific assets resulting in potential for mutual hold-ups
Excessive cost for one party to develop the expertise to carry the transaction itself (e.g. due to
experience curve)
Transitory or uncertain character of market opportunity making a merger or vertical integration
unattractive
Need for a local party in a country due to regulatory environment (as is often the case in China)
Business Readings


By Kenneth Rosenzweig, CMA, and Marily Fischer

Reprinted with permission of the Institute of Management Accountants, from Management Accounting, March 1994; permission conveyed
through Copyright Clearance Center, Inc.

Is managing earnings through accounting methods ethically acceptable? Thats the question we recently asked a
sample group of management accountants. The response to the survey was enlightening.

Our survey was designed as a follow-up and extension of the research done by Bruns and Merchant and published in
Management Accounting in August 1990.
l
They found that managers disagreed considerably on whether earnings
management is ethically acceptable. They also found that in general the respondents thought manipulating earning
via operating decisions was more ethically acceptable than manipulation by accounting methods. Bruns and
Merchant were disturbed by these findings. They were concerned that these practices could be misleading to users of
the information and, over time, reduce the credibility of accounting numbers and thereby damage the reputation of the
accounting profession.

Bruns and Merchant surveyed managers, but accountants as well can influence the level of reported earnings either
directly by means of their impact on the choice of accounting methods or indirectly by monitoring the actions of
managers who influence reported earnings. To learn more about accountants attitudes toward earnings
management, we surveyed 265 members of a regional organization of accountants (approximately 38% of the total
membership). Our questionnaire was adapted from the one used by Bruns and Merchant and included 13
descriptions of managerial actions. The accountants were asked to rate these actions on a 5-point scale from
"ethical" to "totally unethical." (See "Earnings Management Questions," p. 62.)

For the purpose of this study, we define earnings management in terms of the actions of a manager that are intended
to increase (decrease) current reported earnings of the unit for which the manager is responsible without generating a
corresponding increase (decrease) in the long-term economic profitability of the unit. Our definition is consistent with
the way Bruns and Merchant used the term, although there is no standard, widely accepted definition of earnings
management.

The 13 questions on the survey can be grouped by categories (called "factors") of earnings management actions.
Two of these factors involve accounting manipulation, and two involve operating decisions designed to influence
reported earnings. The accounting factors include actions that influence earnings by changing accounting methods.
Examples include recording an expense in the wrong year or changing an inventory valuation in order to influence
earnings. Examples of operating decision manipulations are deferring necessary expenditures to a subsequent year
or offering unusually attractive terms to customers at year-end to draw next years sales into the current year.

Accountants Attitudes: Survey Results

Table 1 lists the mean score for the 13 questions, grouped by factors. To calculate factor scores, we averaged
accountants ethical ratings for the managers actions that were included in that factor. The table shows that the
accounting practitioners participating in the survey rated accounting manipulation much less acceptable ethically than
operating decision manipulation. This finding parallels the attitude Bruns and Merchant found among managers. In
our survey the accountants gave accounting manipulation an average rating between a moderate and a serious
ethical infraction. They saw manipulation of inventory as being just as questionable ethically as other forms of
accounting manipulation.

Generally, the practitioners had few ethical qualms about operating decision manipulation. For these factors, the
practitioners scores indicated an average rating between (fully) ethical and questionable. The practitioners, however,
generally felt that operating decisions that influenced expenses were somewhat more suspect than those that
influenced revenues.

We also looked at whether there was a correlation between the accountants answers and their experience and level
of responsibility. Table 2 suggests that accountants with more years of accounting experience are more tolerant of
operating decision manipulation that affected reported expenses than are their less experienced colleagues.
Consistent with this finding, Table 3 shows that accountants with higher levels of organizational responsibility rate
operation decision manipulations of both types as more ethical than do accountants with less responsibility.

Ethically Troubling Results

Like Bruns and Merchant, we are disturbed by these findings. That accountants are more sensitive to accounting
manipulation than operating manipulation is understandable in light of their training and experience. Several of the
situations in the survey dealing with accounting manipulation not only involved ethically questionable practices, but
they also involved violations of accepted accounting practice. For example, in survey question Number 4, the deferral
of the recording of supplies received to a future accounting period is clearly a violation of generally accepted
accounting principles. Analogous professional standards do not exist for the situations described in the operating
manipulation questions.

The fact that the profession does not have explicit standards against operating manipulation does not mean that
operating manipulation is any more ethical than accounting manipulation. Accountants basic ethical concern here
should be whether such practices involve distortions that mislead users of financial statements. Both accounting and
operating manipulations can lead stakeholders to make inaccurate assessments of a companys economic health.

Given the kinds of decisions stakeholders make in light of reported earnings, both accounting and operating
manipulations can be damaging to their interests. Stakeholders rely on financial statements, assuming that current
reported earnings indicate long-term profitability. When earnings are managed so that financial statements do not
reflect the economic health of the company accurately, stakeholders may make decisions they otherwise would not
have made. Because of its distorting effects, earnings management is contrary to the "Standards of Ethical Conduct
for Management Accountants," which states, "Management accountants have a responsibility. . . to disclose fully all
relevant information that could reasonably be expected to influence an intended users understanding of the reports,
comments and recommendations presented."
2


Our findings that accountants with more experience and higher positions in the organization are more tolerant of
earnings management also is distressing. It could be that persistent pressure for short-term earnings growth tends to
diminish accountants ethical values particularly with regard to manipulation of earnings. Perhaps accountants ethical
sensitivity weakens as they move up in a company, or, in some cases, accountants who already have loose
standards regarding earnings management may be more likely to be promoted.

This finding suggests that it is crucial for accountants with a high level of responsibility in an organization to set a
clear example concerning earnings management and truthful reporting. Newly hired accountants look to their more
senior colleagues for guidance concerning ethical behavior. If senior-level accountants engage in considerable
earnings management, those at lower levels on the promotion ladder will learn quickly that the route to success in the
organization is not facilitated by truthful reporting.

The Professions Response

Our survey points out the need for individual accountants to become more sensitive to the ethical dimensions of
earnings management. For example, accountants may feel pressured by their organization to engage in earnings
management in order to make quarterly reports look more favorable. Also, accountants may be concerned that their
own performance evaluations will be based more on how favorable their prepared statements appear than on
accuracy. Individual accountants need a clear understanding of the distorting effects of earnings management and
the judgment and courage to resist these pressures.

Because decisions by operating managers can distort reported earnings significantly, management accountants need
to assume responsibility regarding operating decision manipulation of earnings. Management accountants are held
responsible by their organizations for the integrity of the financial reporting process. Distorted earnings as a result of
operating decision manipulation reflect negatively on the performance of management accountants. Thus,
management accountants have a stake in the organizations implementing procedures to deter earnings
management by means of operating decisions. As management accounting traditionally has been seen as a staff
function, accountants may think it is not appropriate for them to "meddle" in the decisions of operating managers. But
to the extent that the decisions of operating managers affect their ability to carry out their responsibilities with
integrity, management accountants should be involved.

A number of things can be done to help accountants and managers become more aware of the ethically damaging
effects of earnings management. For example, organizations could institute ethics awareness seminars and
workshops. Ethical analyses of specific earnings management situations could be included as case studies in
professional publications.

Also, a number of specific measures could be adopted to deter earnings management. Company recruitment policies
could be revised to attract employees who already have ethical sensitivity to issues such as earnings management.
Ethical codes that include explicit policies on both accounting and operating manipulation could be adopted.
Management accountants and their organizations could adopt specific monitoring procedures regarding operating
manipulation.

Because of its potential to distort reported earnings and mislead users of financial information, earnings management
is a significant ethical concern. Individual practitioners, their organizations, and professional associations should take
steps to identify and deter this practice.

Discussion Questions
1. What is the definition of earnings management? Give some examples.
2. What level of accountants are most tolerant of earnings management? Do you agree that earnings
management is acceptable to achieve business goals?

1. W. J. Bruns and K. A. Merchant, "The Dangerous Morality of Managing Earnings," Management Accounting,
August 1990, pp. 2225. back
2. "Standards of Ethical Conduct for Management Accountants," SMA 1C, Institute of Management
Accountants, Montvale, N.J., 1983. back