Definition of Income Smoothing
Income smoothing, also known as earnings management, is a financial strategy employed by businesses and organizations to reduce the volatility in their reported net income from one period to another. By leveling out fluctuations in earnings, companies can create an image of stability and predictability for investors. The process involves moving revenues and expenses from one accounting period to another, following the generally accepted accounting principles (GAAP) without engaging in fraudulent activities or misrepresentation.
Income Smoothing: Technique vs. Reason
While income smoothing is a legitimate financial strategy, it can be misunderstood as synonymous with earnings management. Earnings management refers to the process of manipulating reported earnings through creative accounting practices or accounting adjustments to meet internal or external expectations. In contrast, income smoothing is an accounting technique used within GAAP guidelines to create a stable earnings stream, which may not necessarily involve any form of manipulation.
Reasons for Income Smoothing
Companies engage in income smoothing for various reasons:
1. Reducing Taxes: To minimize their tax burden, companies may employ income smoothing techniques such as increasing provisions for doubtful accounts or delaying the recognition of expenses to reduce the amount of taxes payable in high-income years.
2. Attracting Investors: A stable earnings stream is more attractive to investors than a company with volatile financial results. By smoothing out net income, companies can create an impression of predictability and stability that may result in increased investor confidence.
3. Strategic Business Moves: Companies may also employ income smoothing techniques for strategic reasons, such as managing cash flow, reducing interest expenses during periods of high earnings, or investing in long-term projects with uncertain returns by delaying expenses.
4. Ethical Considerations: While income smoothing is legal, it raises ethical concerns when used to manipulate reported earnings or misrepresent financial statements. Companies must ensure they are transparent and communicate the rationale behind any adjustments made to their financial statements.
Examples of Income Smoothing Techniques
Income smoothing techniques include:
1. Manipulating Accounts Receivable: By accelerating or deferring revenues, companies can impact net income in a particular reporting period to smooth out earnings fluctuations. For instance, they may offer extended payment terms to customers to delay revenue recognition or aggressively collect outstanding receivables to recognize revenues earlier than anticipated.
2. Bad Debt Expense: Companies can manipulate bad debt expense by adjusting the allowance for doubtful accounts. By increasing or decreasing this account, companies can impact net income in the current reporting period to create a more stable earnings stream. This method is an example of smoothing accounting numbers within GAAP guidelines and does not involve any fraudulent activities.
3. Depreciation Expense: By altering the depreciation methods or rates, companies can manage reported earnings by either recognizing higher or lower expenses in specific periods. This technique involves using the most appropriate method for the specific asset class based on the company’s industry and GAAP guidelines, ensuring that any changes do not constitute misrepresentation of financial statements.
4. Operating Lease Expenses: Companies may choose to capitalize operating lease expenses instead of expensing them in their income statement as incurred. This technique allows companies to report higher net income during the early years of a lease and lower net income later on, creating a more stable earnings stream. It is important for these leases to meet specific criteria set by GAAP to avoid misrepresentation of financial statements.
5. R&D Expenses: Research and development expenses can be expensed in the period they are incurred or capitalized as an asset and amortized over several years. Companies can choose which method to use based on their business strategy, GAAP guidelines, and the specific nature of the R&D activity. This decision can impact reported net income in different periods, allowing for smoothing earnings fluctuations.
The following sections will delve deeper into the reasons why companies engage in income smoothing, ethical implications, examples of techniques used, advantages and disadvantages, and regulatory frameworks governing this practice.
Legal Versus Illegal Income Smoothing
Income smoothing, which involves managing earnings from one reporting period to the next through legitimate accounting techniques, is generally allowed under GAAP but can sometimes cross the line into illegality if done fraudulently. This section will discuss the differences between legal and illegal income smoothing practices.
Legal Income Smoothing:
When performed in accordance with GAAP rules, income smoothing is a legitimate practice that allows companies to level out fluctuations in earnings from one period to another, making their financial statements more predictable for investors. By lawfully shifting revenues or expenses between periods, companies can improve transparency and build confidence among stakeholders.
Examples of legal income smoothing include adjusting revenue recognition or delaying the recognition of expenses, provided such actions do not violate GAAP guidelines. For instance, a company might defer revenue during a good year if the following year is expected to face challenges or delay the recognition of expenses in a difficult year if performance is forecasted to improve. Such income smoothing techniques can help businesses operate more effectively and efficiently while maintaining a stable earnings stream.
Illegal Income Smoothing:
However, when companies manipulate their financial reports through fraudulent accounting methods, income smoothing becomes illegal. Such practices involve intentionally misstating financial information, including revenues and expenses, to create the appearance of steady earnings or hide losses. These deceptive practices violate GAAP and can lead to significant consequences for both the company and its executives, ranging from regulatory fines to criminal charges.
Examples of fraudulent income smoothing techniques include manipulating accounts receivable by underreporting bad debts in one period and overstating them in another or using complex financial instruments to hide losses or inflate profits. These actions, while illegal, can provide short-term benefits by boosting earnings or masking losses, potentially attracting investors and maintaining the illusion of financial stability.
In summary, income smoothing is a common practice among companies seeking to level out fluctuations in their earnings and present more stable financial statements to stakeholders. However, it’s essential for businesses to remain within GAAP guidelines, as engaging in fraudulent income smoothing can lead to severe consequences, including legal action and reputational damage.
Reasons for Income Smoothing
Income smoothing is a financial reporting technique employed by organizations to manage earnings fluctuations from one accounting period to another, presenting a more consistent financial image to stakeholders. The practice of income smoothing involves the legitimate adjustment of revenues and expenses between periods without resorting to outright fraud or deceit, enabling companies to maintain predictable financial results. Income smoothing is particularly crucial for businesses with volatile earnings due to factors like seasonality, economic conditions, and industry trends.
There are several reasons why companies indulge in income smoothing:
1) Tax reduction: By managing tax liabilities through strategic planning and income manipulation within the confines of Generally Accepted Accounting Principles (GAAP), organizations can minimize their tax burden and optimize cash flow, resulting from income fluctuations. For instance, by increasing provisions for losses in years with high profits or donating a larger portion to charitable causes, companies can reduce their taxable income.
2) Attract investors: Consistent financial performance is a key factor that attracts potential investors. By smoothing out earnings, organizations present a more stable and attractive image to the investment community. A company with predictable financials is less risky than one with fluctuating earnings, making it an appealing option for those seeking long-term capital appreciation or income generation.
3) Business strategy: Companies employ income smoothing as part of their overall business strategy, enabling them to optimize their operations and cash flow. For example, in years with high profits, organizations may increase expenses like wages or depreciation, while in years with lower profits, they might decrease these same expenses. This not only smooths out earnings but also allows businesses to operate more efficiently by managing cash flow effectively during cyclical downturns.
An excellent example of income smoothing comes from adjusting the allowance for doubtful accounts. Consider a situation where a company expects to receive $1,000 in payment for goods sold in one reporting period and $5,000 in the following reporting period. To smooth out earnings and reduce net income in a high-income year, the organization might include the entire $6,000 as an allowance for doubtful accounts expense in that year. This would increase bad debt expense and decrease net income by $6,000.
It’s crucial to note that income smoothing is not equivalent to fraudulent accounting practices or creative bookkeeping methods. The practice involves adjusting revenues and expenses within the boundaries of GAAP and ensuring accurate financial reporting to stakeholders. However, it’s essential for companies to exercise judgment when employing such techniques to avoid raising suspicions of deception or misrepresentation.
By understanding the reasons behind income smoothing, we can appreciate its importance as a financial management strategy for businesses seeking to present consistent and predictable financial performance while optimizing their cash flow and minimizing tax liabilities.
Examples of Income Smoothing Techniques
Income smoothing is an accounting strategy employed by businesses to level out the volatility of net income from one financial reporting period to another, making their earnings appear more predictable and stable. This practice can be accomplished using various techniques that manipulate revenues or expenses within Generally Accepted Accounting Principles (GAAP) guidelines. Two common methods are managing accounts receivable and recognizing bad debt expense.
Managing Accounts Receivable:
Companies may use a technique called “managing accounts receivable” to delay revenue recognition from one period to another. This strategy is particularly useful during periods of high profitability or when expecting lower earnings in the following reporting period. By accelerating sales at the end of a year, businesses can defer recognizing related revenues until the subsequent period. Conversely, they may also delay billing customers in a weak quarter to record revenue later. However, these practices must be supported by valid evidence and not misrepresent the substance of transactions to avoid crossing the line into fraudulent accounting.
Bad Debt Expense:
Another common income smoothing technique revolves around managing bad debt expense. Bad debt expense refers to a company’s estimation of unrecoverable accounts receivable balances. By adjusting this balance between periods, businesses can alter the timing of revenue and expenses. For instance, if a client is expected to pay for goods or services in two accounting periods, a company might choose to record bad debt expense in one reporting period instead of distributing it over both years. This approach will result in lower net income in the current period while increasing bad debt expense, thus smoothing out earnings. Income smoothing through manipulating bad debt expenses is only acceptable within the guidelines set by GAAP, and companies must ensure they have sufficient evidence to support any changes made to this account balance.
While these methods enable businesses to manage the volatility of their reported income, it’s crucial for management to avoid crossing ethical boundaries. Transparent reporting and clear communication with investors can help mitigate concerns around manipulative accounting practices. Additionally, companies need to remain aware of regulatory frameworks and follow them closely to ensure their income smoothing techniques align with GAAP and other relevant accounting standards.
Advantages and Disadvantages of Income Smoothing
Income smoothing, also known as earnings management or financial engineering, is a strategy employed by companies to level out income fluctuations between reporting periods. By manipulating accounting entries, businesses can present a more consistent and predictable earnings stream to investors, potentially enhancing their stock valuation and attracting new capital. While some benefits come with income smoothing, it also carries inherent risks and ethical concerns.
One significant advantage is the ability to reduce taxes by managing expenses and revenues strategically. Depending on tax regulations in various jurisdictions, companies may increase provisions for losses or charitable donations to secure favorable tax benefits. This can lead to a reduction in overall tax liabilities while maintaining a steady financial profile.
Income smoothing also appeals to investors seeking long-term stability and predictability. Investors often prefer stocks with consistent earnings over volatile ones, which may deter them from investing in companies with unpredictable income patterns. By employing income smoothing techniques, firms can present themselves as reliable investments that provide a stable return on investment (ROI) over the years.
Furthermore, strategic business moves can necessitate income smoothing. For instance, during high-profit periods, businesses may choose to increase expenses by providing bonuses or expanding their workforce to create more stability in earnings. Conversely, in low-earnings scenarios, they might reduce expenses through layoffs or decreased bonuses to offset losses. Such strategic moves help manage short-term fluctuations and maintain a balanced financial outlook.
However, income smoothing carries potential drawbacks. Deliberately misstating financial reports can lead to regulatory scrutiny and reputational damage. Even if a company remains within the legal boundaries of Generally Accepted Accounting Principles (GAAP), investors may question the validity of financial statements that are unnaturally steady. In extreme cases, such practices may result in legal issues, fines, or even criminal charges.
Additionally, income smoothing can divert resources away from long-term investments and innovation, as management focuses on maintaining a consistent earnings picture rather than driving growth and value creation. This can lead to missed opportunities in the market and lower overall returns for shareholders in the long term.
In conclusion, income smoothing offers advantages such as reduced taxes, investor attraction, and strategic business maneuvers. However, it also presents disadvantages like regulatory scrutiny, diversion of resources, and ethical concerns. Companies must weigh these pros and cons carefully to determine if income smoothing is the right strategy for their unique financial situation. It’s crucial for management to employ transparent and legal accounting methods while maintaining accurate financial records to ensure a steady financial performance that resonates with investors and stakeholders.
Impact of Income Smoothing on Stakeholders
Income smoothing can significantly influence the attitudes, behaviors, and perceptions of various stakeholders towards a company. By presenting financially stable earnings to external investors, companies may experience increased investor confidence and attract more capital inflows. However, this deceptive practice could also raise ethical concerns for both internal and external stakeholders such as employees, creditors, and regulatory bodies.
Impact on Investors:
Investor attraction is one of the primary reasons why companies engage in income smoothing. By portraying consistent financial performance through income smoothing techniques, firms can attract a larger investor base. The confidence that comes with steady earnings can lead to an increase in share prices and a lower cost of capital for the company. However, this practice can also result in unrealistic expectations regarding future performance, leading to disappointment when earnings fail to meet these expectations.
Impact on Creditors:
Creditors are another stakeholder group affected by income smoothing. Companies that engage in this practice might manipulate their reported financials to improve their creditworthiness and secure loans or financing at favorable interest rates. However, if the truth about the company’s underlying financial health is uncovered, it can lead to significant financial losses for the creditor.
Impact on Employees:
Employees may be indirectly impacted by income smoothing as it can influence their compensation and job security. For instance, a company might delay expenses in order to boost reported earnings and subsequently provide larger bonuses or salary raises in that period. This practice could potentially lead to an unrealistic sense of financial performance within the organization, with employees’ wages being based on manipulated data.
Impact on Regulatory Bodies:
Regulatory bodies like the Securities and Exchange Commission (SEC) have strict rules against deceptive financial reporting practices that include income smoothing. Misrepresentation of financial statements can lead to hefty fines, reputational damage, and even legal consequences for both the company’s management team and its board members.
Conclusion:
Income smoothing is a common practice among companies seeking to present financially stable earnings to external stakeholders while reducing taxes or furthering strategic business objectives. However, it can have significant ethical implications for various stakeholder groups like investors, creditors, employees, and regulatory bodies. Companies must be aware of the potential risks and consequences associated with income smoothing, especially in an era where financial transparency is increasingly emphasized. Ultimately, open communication, accurate reporting, and a commitment to ethical practices will ensure that all stakeholders are informed about a company’s true financial position.
Ethical Implications of Income Smoothing
Income smoothing, the practice of using accounting techniques to level out fluctuations in net income from one reporting period to another, can carry ethical implications for institutional investors. While it’s a common tactic used by companies to make their earnings appear more stable and predictable, the potential consequences of misuse or manipulation can lead to negative repercussions.
The goal of income smoothing is to present a company with consistent financial results, but there are ethical boundaries that should not be crossed. Income smoothing becomes unethical when it involves creative accounting methods, misstatements, or fraudulent activities – actions that intentionally manipulate financial reports to mislead investors, creditors, and other stakeholders.
Creative Accounting
When income is managed through creative accounting, companies may use techniques like earnings management, which can involve various methods such as manipulating inventory, revenue recognition, or capital expenditures. While not illegal in itself, these tactics can border on deception when they misrepresent a company’s financial health or future prospects to investors.
Misstatements and Fraudulent Activities
More serious ethical concerns arise when companies engage in outright fraudulent activities, such as cooking the books or manipulating accounting records to intentionally deceive investors, creditors, and regulatory authorities. In these cases, income smoothing is no longer a legitimate strategy for managing earnings but rather a method of financial manipulation that can result in severe consequences for all stakeholders involved.
Impact on Stakeholders
Ethical concerns surrounding income smoothing primarily revolve around the impact it has on various stakeholders, including investors, creditors, and employees. When a company engages in unethical income smoothing practices, stakeholders may suffer from misaligned expectations regarding financial performance, potential investment losses, damaged reputation, or even employment consequences.
Regulatory Framework
In order to mitigate ethical concerns and maintain transparency, regulatory frameworks such as GAAP (Generally Accepted Accounting Principles) and IFRS (International Financial Reporting Standards) provide guidelines on acceptable accounting practices for income smoothing. Additionally, government agencies like the SEC (Securities and Exchange Commission) enforce regulations to prevent fraudulent activities and maintain investor confidence in financial markets.
Conclusion
Income smoothing plays an important role in managing earnings and providing stakeholders with consistent financial results. However, when income smoothing crosses ethical boundaries through creative accounting methods or fraudulent activities, it can result in severe consequences for all involved parties. Institutional investors must be vigilant in evaluating a company’s financial reports and understanding the regulatory framework governing income smoothing to ensure they are making informed investment decisions.
Regulatory Framework for Income Smoothing
The practice of income smoothing, which aims to level out fluctuations in net income from one reporting period to the next, is an accepted but closely monitored aspect of financial management for companies. By managing earnings in this way, firms can create a more stable and predictable financial picture, reducing investor uncertainty and potentially attracting investment. However, it’s crucial that income smoothing adheres to established accounting principles to remain ethical and compliant with regulations.
Under GAAP (Generally Accepted Accounting Principles), income smoothing is a legitimate practice when implemented within the rules. This means accountants can adjust revenues and expenses across periods through legal methods, such as changing the timing of revenue recognition or the deferral of expenses. These practices do not involve misstatements, which would constitute outright fraud.
However, it’s important for companies to be aware that income smoothing carries ethical implications. While some consider these adjustments a reasonable response to volatile business conditions and investor expectations, others view the practice as potentially manipulative if taken too far or done in an unethical manner.
One critical regulatory body involved in overseeing income smoothing is the Securities and Exchange Commission (SEC). The SEC has issued several regulations regarding earnings management practices, such as Regulation G, which requires companies to report their earnings excluding certain non-GAAP adjustments. This helps ensure transparency for investors and promotes a more level playing field in the financial markets.
Another set of regulations governing income smoothing come from the International Financial Reporting Standards (IFRS). Companies following IFRS must comply with their specific requirements regarding revenue recognition, expense deferrals, and asset revaluations to ensure they are maintaining a fair representation of their financial results.
In conclusion, companies engaging in income smoothing should remain aware of the legal and ethical implications of this practice. Adhering to GAAP and other relevant accounting regulations is crucial to prevent potential violations and maintain transparency with investors. By using sound judgment and focusing on long-term value creation, firms can effectively smooth out their financial results while maintaining integrity in their reporting.
Understanding the regulatory framework for income smoothing is vital for companies seeking to navigate this complex area of accounting and finance. Compliance with GAAP, IFRS, and SEC regulations will help ensure that income smoothing remains a valuable tool in managing earnings rather than a source of controversy or potential legal issues.
Income Smoothing vs. Earnings Management
One crucial concept related to financial reporting that frequently arises in discussions about financial statement analysis is the difference between income smoothing and earnings management. These two terms are often used interchangeably, but they possess distinct meanings in the realm of finance and accounting. Income smoothing refers specifically to an accounting technique that involves adjusting reported earnings from one period to another with the objective of creating a stable and predictable earnings stream for investors. Earnings management, on the other hand, is a broader term that encompasses various practices intended to manipulate financial statements to influence stakeholders’ perceptions about a company’s performance or financial position. While income smoothing is within the bounds of Generally Accepted Accounting Principles (GAAP), earnings management can include both legal and illegal activities, such as creative accounting or outright fraud.
Income Smoothing: The Purpose and Techniques
The primary goal of income smoothing is to level out fluctuations in net income from one period to the next by managing revenues and expenses, allowing for a more stable representation of a company’s financial performance. Income smoothing techniques include adjusting accruals, such as prepaid expenses and accounts receivable, as well as deferring revenue or expenses between periods, depending on the financial situation of the company.
Accountants employ income smoothing to help companies manage investor expectations by reducing volatility in reported earnings, making it easier for investors to analyze trends and forecast future performance. This practice is most commonly used when a company experiences high fluctuations in earnings due to seasonal factors or one-time events. Income smoothing allows the company to provide more accurate financial information while maintaining investor confidence.
Earnings Management: The Broader Perspective
Earnings management, as mentioned earlier, is a broader concept that includes various practices aimed at influencing stakeholders’ perceptions about a company’s performance or financial position by manipulating financial statements. Some earnings management techniques are within the accepted accounting principles, while others involve outright fraud. Income smoothing falls under the former category.
Legal vs. Illegal Earnings Management Techniques
The line between income smoothing and earnings management becomes blurred when we delve deeper into the different methods used to manage earnings. While income smoothing is an accepted practice that involves legal adjustments within GAAP, some earnings management techniques are not.
Creative accounting, a form of fraudulent financial reporting, includes manipulating financial statements by using accounting loopholes or misstating figures in order to deceive investors and analysts about a company’s true financial condition. Examples of creative accounting include:
1. Revenue Recognition Fraud: Deliberately recognizing revenues prematurely or delaying revenue recognition, which can significantly impact net income and manipulate earnings trends.
2. Expense Deferral: Delaying the recognition of expenses to a later period to inflate net income in the current reporting period.
3. Earnings Guidance Manipulation: Providing misleading or inaccurate earnings guidance to analysts and investors to influence their expectations and create a positive market reaction.
The differences between income smoothing and earnings management stem from the intentions behind these practices. Income smoothing aims to provide more accurate financial information by managing revenues and expenses within GAAP guidelines, while earnings management can be used to intentionally mislead investors, creditors, or other stakeholders about a company’s actual financial situation.
Conclusion: Balancing the Needs of Stakeholders
In summary, income smoothing is an accounting technique that aims to create a more stable and predictable earnings stream by adjusting revenues and expenses within GAAP guidelines. Earnings management, on the other hand, is a broader term encompassing various practices aimed at influencing stakeholders’ perceptions about a company’s performance or financial position, some of which can be misleading or fraudulent. While income smoothing is an accepted practice in financial reporting, earnings management requires careful consideration to ensure that it remains within legal and ethical boundaries. The ultimate goal for companies should always be transparency and accuracy when dealing with financial reporting, as this will help build trust among stakeholders and maintain a strong reputation over the long term.
FAQs on Income Smoothing
What is income smoothing? Income smoothing is a financial reporting technique used by companies to level out fluctuations in net income from one period to another, making their earnings appear more consistent and predictable to investors. This technique aims to reduce the perceived risk associated with volatile earnings and attract investors who prefer stable investment opportunities (SEO: income smoothing, financial reporting, accounting techniques, GAAP, investor attraction).
Is income smoothing illegal? Income smoothing is not inherently illegal if it follows Generally Accepted Accounting Principles (GAAP). However, the line between legitimate income smoothing and fraudulent activities can be blurry. Companies that manipulate their financial statements to deceive investors or regulatory bodies risk facing legal consequences (SEO: GAAP, income smoothing, fraud, deception, SEC regulations) (FAQ: is income smoothing illegal).
Why do companies engage in income smoothing? Companies may engage in income smoothing for several reasons. They might aim to reduce their taxes by adjusting expenses or provisions. Alternatively, they could be seeking to attract investors by presenting steady and predictable earnings (SEO: companies, income smoothing, reduce taxes, investor attraction) (FAQ: why do companies engage in income smoothing).
How is income smoothing performed? Income smoothing involves the manipulation of financial statements within the boundaries of GAAP. For example, a company might delay revenue recognition or accelerate expenses to smooth out earnings from one period to another (SEO: income smoothing, manipulate financial statements, revenue recognition, expense recognition, GAAP) (FAQ: how is income smoothing performed).
What are the advantages of income smoothing? Companies that engage in income smoothing can benefit from more predictable earnings and potentially lower financing costs. However, it’s essential to note that income smoothing techniques may not always be advantageous and could lead to unintended consequences (SEO: income smoothing, advantages, predictable earnings, financing costs) (FAQ: what are the advantages of income smoothing).
What are some examples of income smoothing techniques? Common income smoothing techniques include adjusting revenue recognition, delaying expenses, and manipulating provisions for doubtful accounts or bad debts. These methods can help companies present a more stable earnings picture to investors (SEO: income smoothing, techniques, revenue recognition, expense recognition, provisions) (FAQ: what are some examples of income smoothing techniques).
What are the disadvantages of income smoothing? Companies engaging in income smoothing may face potential drawbacks like higher audit risks, damage to their reputation, and legal consequences if the methods used are deemed fraudulent (SEO: income smoothing, disadvantages, audit risks, reputation, legal consequences) (FAQ: what are the disadvantages of income smoothing).
What are the ethical implications of income smoothing? Income smoothing can raise ethical concerns as it involves manipulating financial statements to present a more favorable picture to investors. It’s essential for companies to consider the potential consequences and ensure that their reporting practices align with transparency, honesty, and integrity (SEO: income smoothing, ethics, transparency, honesty, integrity) (FAQ: what are the ethical implications of income smoothing).
How does income smoothing impact stakeholders? Income smoothing can have various impacts on different stakeholder groups. For instance, investors may benefit from more consistent earnings reports but could be misled if the underlying financials are not accurately represented (SEO: income smoothing, stakeholders, investors, deception) (FAQ: how does income smoothing impact stakeholders).
What is the regulatory framework for income smoothing? Regulatory bodies like the GAAP, IFRS, and SEC have guidelines to ensure that financial reporting practices are transparent and honest. Companies engaging in income smoothing must adhere to these regulations to avoid potential legal consequences (SEO: income smoothing, regulatory framework, GAAP, IFRS, SEC) (FAQ: what is the regulatory framework for income smoothing).
What is the difference between income smoothing and earnings management? While both income smoothing and earnings management involve manipulating financial statements, there are differences between the two. Earnings management may include creative accounting techniques that are not within the boundaries of GAAP, while income smoothing adheres to the guidelines set by the regulatory bodies (SEO: income smoothing, earnings management, creative accounting) (FAQ: what is the difference between income smoothing and earnings management).