The net income (earnings) figure is arguably the most important item reported in the Statement of Profit or Loss and Other Comprehensive Income. Hen

The net income (earnings) figure is arguably the most important item reported in the Statement of Profit or Loss and Other Comprehensive Income. Hence, managers are often tempted to resort to the use of various techniques, devices, policies and schemes to increase or decrease the earnings figure.

Tesco, Britains biggest grocer reported a 263 million black hole in its accounts in September 2014. Preliminary investigations revealed that the scheme used by some of the top executives of the firm to massage the companys earnings started well before 2014.

Commenting on Tescos accounting scandal, Bruno Monteyne, an analyst at Bernstein stated as follows: They started treating suppliers as a source of profits. Normally a retailer makes money by buying something at 20p and selling it for 30p. But when Tesco's profits came under pressure, they looked to get money for doing things that are not directly linked to selling more groceries."

In August 2017, the High Court approved a settlement between Tesco and the Serious Fraud Office that required the firm to pay 129m fine for the accounting scandal. In addition, Tesco agreed to pay 85 million compensation to Investors.

Clearly, earnings management is not only unethical but also costly. It also raises questions on the effectiveness of corporate governance mechanisms in constraining earnings management.

Required

Discuss the accounting techniques used by firms to manage earnings and the motives behind earnings management. Your work should also discuss the empirical evidence on the effectiveness of corporate governance mechanisms in constraining earnings management. Cite literature to support your answer.