Conservatism and Earnings Management †Free Samples to Students

Question: Discuss about the Conservatism and Earnings Management. Answer: Introduction: The accounting scandals and frauds over the past two decades have resulted in a debate associated with the financial reporting systems and their incapability in detecting fabrication of earnings. For instance, the accounting scandals of Enron, Xerox and WorldCom have exposed serious gap in the practices of financial reporting and audit system inadequacy (Kothari, Mizik and Roychowdhury 2015). The swindles occurred in the above-stated organisations have not been due to the accounting misstatements; instead, they occurred due to the prevalent earnings management practices of these organisations. As commented by Fang, Huang and Karpoff (2015), earnings management could be described as the deliberate manipulation of the financial information on the part of managers to reach a targeted level of profits. In addition, such manipulation is conducted through the pliability of various accounting standards in selecting the method of accounting, its application and event timings. In the current era, the financial managers have resorted to earnings management for meeting or beating the market projections and expectations of the analysts. The current research aims to provide a critical overview of the literature associated with earnings management. In addition, the research questions and hypotheses have been set along with the operational definitions and measurement. Finally, the research sheds light on discussing the research methodology with the expected outcomes of the research. Woolworths Bankstown is located in the heart of Bankstown serving the whole region with an array of groceries that include meat, vegetable, fruit and packaged food(Bankstowncentral, 2017). The company also sells other non-food items like magazines, stationery and DVDs. This makes it among the 1000 stores around Australia comprising of 968 supermarkets and 19 convenience stores with the same logo. Other supermarkets at Woolworths have been traded as Safeway stores in Victoria and three other stores that are located in the suburbs of Melbourne and other surrounding areas in Victoria and new south wales(Walsh, 2014). Background Literature review In Australia, the supermarket industry is one of the most fierce with high competition rising from the internal and external organisations. With the entry of Aldi in the past five years, the industry has significantly been altered for old timers like Woolworth. The popularity for Aldi has for example grown over the past years due to its discount on private-labeled products. Some of the giants affected by this trend include Woolworth, Coles and Foodworks who continue to struggle in the price-tense industry. the profit margins of most of these supermarkets are falling with time as indicated in the following graph: With the above trends of competition in the retailer industry, it calls for woolworths to set standards that they can apply to ensure services and quality for its customers. The supermarket industry in Australia is also faced with a lot of competition as new entrants try to replicate what the company is already doing in terms of expansion. For example, one of the few entrants in the supermarket business, Aldi which is German Based has expanded to Woolworth which continue to provide competition for the companys earnings. According to a report by Coch, (2017) the companys sales were up to a near AUD19 billion investment the food business, brought results of up to AUD500 million as earnings of the supermarkets declined to around AUD 130 million in the half year financial report in 2016. Other statistics regarding the woolworth industrial performance shows a decline in sales per square metre with regard to the countrys food division from AUD16,251 to AUD15,927 which is a decline of very 2%. In the same manner, when looking at higher real number with regard to sales, it shows that woolworth will grow in its retail price space in a much quicker manner(Fallon, 2005). A lot of evidence also show that this is influenced by the growing number of many smaller inner-city stores and other new stores including Bansktown. Economically, the retail sector in Australia is a subject of much debate among many analysts. There is a lot of attention that is centered on the Cole and Woolworths duopoly in the sector. The two supermarkets currently control the market share of 70-80% of the whole supermarket business in the country. In this regard, there are calls for competition reform laws that will call for prevention on misuse of market power. Currently, Coles and woolworths still control the supermarket economy in Australia than their competitors. They are dominant in more towns and demonstrate a much better availability of grocery products in the Australian supermarket industry. in economic terms thus, a perfect market is one that indicates many sellers and buyers, where all products that are sold by the supermarkets should be identical with no barrier to market entry. In this regard, the new competition for the two supermarket is Aldi which comes in with pricing competition. According to Fallon, (2005), a perfect competitive market is one that is able to establish a long relationship regarding demand and supply. However the current retailer market does not indicate this as Woolworth will not accept the market price which and they will work on competition by setting their own market price. This is a major contrast to other new entries like Aldi which operates smaller stores that are simple and more agile when it comes to logistics management. In this regard, it shows that the legacy woolworth has held for decades will continue to have a major turnaround with regard to profitability that some of its stores may have to close. Effective management of the company earnings is the only way to go. Other conundrums like Metcash and Coles have also been driven to lease new and smaller format stores that retain customer loyalty when maintaining their earnings margin. With this in mind it is important to find out the impact of earnings management practices at woolworth and how this will ensure the supermarket remains relevant to the australian markets(Anninos, 2014). Parent Literature Review When it comes to the supermarket business, different consumer will always have different interests in regard to products that are displayed on the shelves. This is due to different consumer behavior and variations on the needs of each customer and what they aim to benefit from the products they purchase. Satisfying all customers is almost impossible calling for supermarket chains to respond by offering various packages and brands. It has thus become important for Woolworth Bansktown branch to move from mass marketing and focus more on target marketing, which puts more energy on a particular group of customers(Armstrong Kotler, 2012). When an organisation is able to target a particular group of customers, this is referred to as customer segmentation. According to the Henry Ford Model T one can have any color as long as it is black, this means that market segmentation will always work to attract a considerable interest in the brand. companies such as Aldi , Burtons and British Shoe co rporation are evidence that market segmentation can eventually lead to the success of the business.(Blyth, 2006) This means that so long as companies are competing for the limited sales then markets need to be separated to smaller and homogenous markets. The market segmentation concept was discovered by Smith (Arnold, 2014) who was of the idea that segmentation was a temporary phenomenon for businesses to exhale. By effectively using the market segmentation, Woolworth Bansktown branch will be able to earn more recognition of the market segments as it sees groups of customer in the individual markets increase. Market segmentation thus becomes very important when looking at the smaller homogenous markets so as to change the preference of the company product to fit a significant market need. According to Beardwell Claydon (2010), such segments are usually subjected to the same market so as to create the much needed behavior. In this manner, the underlying principle on market segmentation is about the fragmentation of the market where a homogenous market will not exist. According to Arnold (2014), the further add that the idea of consumers being different from one another and the influence this has in demand will also be considered. For a Woolworth Bansktown branch to be able to serve all customers may not be easy since customers in the region will different preferences meaning they will have to be approached differently. For the retailer to be able to satisfy their consumers, it will have done the most important thing with regard to market segmentation. Arnold (2014), adds that market segmentation is usually the focal and prevailing concept that offers companies with directives on marketing strategies to be used. Segmentation has been adopted by various businesses in the event that the business is working towards differentiating itself with the rest in the industry. Arnold (2014), continues to argue that one of the most popular ideas in marketing will look at market segmentation. According to Arnold (2014), for example, business that adopt market segmentation will always realize a wide range of advantages. This is especially true when looking at information that is obtained by the companies. Armstrong Kotler ( 2012) also added that companies should be in a position to gain the trust of consumers in order to win them over and accomplish the marketing objectives. they should be able to understand the needs of each customer and fulfil them in any way. In addition, when companies use the information regarding segmentation, they are also able to understand the wants of consumers as well as their needs. Due to the fact that a person aims with promotion and advertising to inform market segments of the service or product on the existing market the information will have been applied to direct the marketing activities of the business. business will also be able to adjust the shifting market demands and come up with a good strategy to win back their customer even in an environment of new entries like the one Woolworth is facing with the entry of Aldi. Lastly, Arnold (2014) advises that for a company or business to gain the competitive advantage, it is important that they focus on a particular group of customers and come up with a marketing mix that will win them over. This shows that market segmentation will always assist businesses in achieving the required profitability that their current position. This shows that market segmentation is a good tool for Woolworth as it will contribute to the increase in earnings and enable it maintain a market position. One of ways that Woolworth Bankstown has been able to make shopping convenient to customer is through embracing technologies in most of their operations. firstly the company ensures that banking facilities are found in the store, this provide customers with convenience to make transactions after which they will be able to do their shopping. The company also makes alliances with banks to enable customers purchase goods with their bank credit card like the woolworths master card(Arnold, 2014). Which provides customers with added benefits like flier points. With time this increases the amount of purchase and consumers are influence in shop at the store with the aim of gaining points at any location. There is also a reward program where customers get discounts when shopping at their stores. According to a research by credit Suisse, food prices fell by 2 per cent in the September quarter after the deflation of 2.7 per cent at Woolworths in the first quarter and 2.4 per cent at Coles. The prices for the retailer, especially on private label product have also reportedly fell by 4.4 per cent in 2016, this exceeded deflation of 2.6 per cent for all branded items(Mitchel, 2016). With comparison to Coles, the privately labeled deflation was 3.3 per cent in the last three months towards September 2016 and 3.7 per cent for all the branded goods. This shows that unlike woolworths, Coles is investing more on heavily packaged goods, calling for woolworths to respond to industry feedback as the industry continues to be more and more difficult with new entries. They need to review their pricing strategy if they are to survive the industry. one of the ways that woolworths Bankstown can do this for example will be to offer half price specials for branded products, however, this should only be done among loyalty club members to encourage more customers to enter the loyalty program(Mitchel, 2016). Reports also indicate the in 2016 the company focused more on meat pricing as a key category as it is a driver of the retailers larger basket. However, a review on pricing is important as the industry continue becoming more and more competitive. Actually products will also look at good quality and after sales service in terms of customers. Continued training will also be vital for all its departments to ensure that only the most professional and customer oriented are working for the branch retailer(Boatright, 2015). If this is done well, the company will be on its way to regaining the markets and even increase in terms of market share. This will also ensure customer loyalty as service friendly supermarket that looks at the consumer needs not as a multinational but as a branch supermarket in the region. Market segmentation thus will go a long way to ensure earnings management due to efficiency and increased accountability and regulated operational budget. so far the company has not been doing so bad with regard to expansion, however this will also have to be stopped for a while and if possible other branches should close in order to maintain its financial position(Grimshaw, et al., 2008). Availability is only realized through localization of Woolworth Bansktown branch products . They can take advantage of the local people and local resources to grow and increase their earnings. For the company to transfer its core competency and specific culture at the local branch, the parent company will have to send technical people to the branch and teach the local employees on the improved technologies and other technical aspects of the business so as to learn from it(Arnold, 2014). In addition, Woolworth needs to respect the specific needs of the locals as this is one of the ways it can promote its operations and philosophy in management. They also need to make consistent change with regard to the every growing markets and competition in the retailer industry. its focus should always remain on the core products that include laundries, food, fruits and other goods for daily use. Arnold (2014), adds that this can be done by providing one of the best customer services so as to maintain and increase loyalty. This will also provide an addition source or revenue and increase its profit margin from where it currently stands. There also needs to be a strong dealership bridge that will enable an increase in the coverage of the companys products making it deliver better services to the people. the local branch needs to find ways of tapping in to the unexploited markets of the elderly people in the country. Statistics show that the number of elderly people is going to increase in the next five years, this provides a new market with very little competition(Li, 2013). In addition, the aged are cautious in spending making Woolworth products attractive in this market. Research questions and hypotheses: The following research questions have been set to fit the purpose of the research: What is the magnitude and presence of earnings management in Woolworths Group through the estimation of discretionary accruals What is the current practice of earnings management in Woolworths Group? What is the pattern of discretionary accruals of Woolworths Group for a three-year period? How could Woolworths Group improve its existing earnings management practices? The following research hypotheses have been framed based on the research topic: H0: The association between the compensation of plan executive and coefficient of earnings response is negative H1: The debt limit and coefficient of earnings response have negative relationship with each other H2: The minimisation of the financial performance of executives and coefficient of earnings response has negative association with each other Operational definitions and measurement: The background of the research is simplified in order to make it achievable. The earnings management practices of Woolworths Group could be gauged in terms of compensation of plan executive, debt limit and coefficient of earnings response. Therefore, the researcher will use these variables to arrive at the outcome of the research. The scope of the research is limited to the evaluation of these variables and the degree to which the earnings management practices are affected on the part of these variables. The research excluded the consideration of the other Australian retail companies, which might help in revealing the industry trend. Therefore, Woolworths Group will be considered along with the above variables to test the research hypotheses. Sampling serves as techniques in which targeted respondents are selected for research from a huge population. Probability sampling specifically simple random sampling will be employed in this research for carrying out survey with the financial managers of Woolworths Company as it offers equal chances to the respondents for being chosen within the survey. It has been gathered that quantitative evaluation requires larger sample size for gaining and evaluating responses gathered from survey participants. Simple random sampling will facilitate the research to select most important primary data source for blending relevant information that is aligned with research objectives (Flick 2015). Large sample size will be selected in this research for evaluating responses gathered from survey participants effectively. For this reason, 11 financial managers of Woolworths Company will be chosen to evaluate their responses. The data gathered from the research on Earnings Management Practices in Woolworths Group will be analysed by means of employing several analytical methods. Considering the same, efficient selection of analytical methods is important to attain appropriate and suitable research findings. In addition to that, it facilitates sustaining transparency along with evaluating composed data. Quantitative data those are gathered will be analysed and represented through graphs and tables for simplifying the process of analysis for the collected data (Mackey and Gass 2015). Additionally, MS excel tool will be employed for converting the consumers opinion into certain percentage for anticipating the respondents insights trends. Primary and secondary data will be gathered for evaluating the earnings management practices within Woolworths Company. Primary data for this research will be gathered from surveying 11 financial managers of Woolworth Company. Secondary data for this research will be gathered from relevant journals, previous research papers, books, articles and annual report of Woolworths Company. Quantitative data will be gathered for the recent research that will be analysed for gathering relevant information and research findings (Panneerselvam 2014). For collecting primary research, the researcher will develop a planned questionaries that encompass both close and open-ended questions. Survey will serve as the best option to collect relevant quantitative data as it facilitates collection of significant data from huge sample size. Expected outcomes: Analysis of the research results will reveal existence of increased earnings manipulation within consumer durables and energy industry. The research will reveal that earnings management level in the upcoming years can improve the governance measures, audit along with financial reporting of Woolworths Company. The findings will also reveal that such measures can facilitate the company to be successful in constraining earnings manipulation along with making sure of the reliability of the reported numbers (Tarone et al. 2013). The research results are intended to reveal increased correlation among effective audit associations and decreased levels of earnings management in the Woolworth Company. The research results is intended to offer effective insights for regulators and Woolworth Company boards that will analyse the efficiency of the companys boards along with enforcing effective governance measures. Research findings will reveal that such measures can retain earnings management that can after all safeguard investor interest. Conclusion: Probability sampling specifically simple random sampling will be employed in this research for carrying out survey with the financial managers of Woolworths Company. Simple random sampling will facilitate the research to select most important primary data source for blending relevant information that is aligned with research objectives. Quantitative data those are gathered will be analysed and represented through graphs and tables for simplifying the process of analysis for the collected data. Primary and secondary data will be gathered for evaluating the earnings management practices within Woolworths Company. The research will reveal that earnings management level in the upcoming years can improve the governance measures, audit along with financial reporting of Woolworths Company. References: Anninos, L., 2014. 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