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corporatefinanceinstitute.com
29
The Corporate Finance Institute
Accounting
Securities law and financial accounting theory
Securities laws around the world are fully aware of this information 
asymmetry phenomenon in our economy and have put in place 
measures to protect investors.
For example, public companies must adhere to securities laws set 
out by the Canadian Securities Administrators (CSA) in Canada or the 
Securities and Exchange Commission (SEC) in the United States.
An example of a specific measure is when these laws set out “black-out 
periods” where management and other individuals with access to more 
sources of information are not allowed to buy or sell company shares 
because they have an information advantage over users that only have 
access to the financial statements.
Reasons for Upward Earnings 
Management
Reasons for Downward Earnings Management
Bonuses given out in relation 
to net income
Reduction in taxes
Meeting debt covenants
Increase the chances of obtaining government assistance
Enhancing the perception of 
the company (i.e. reducing the 
perception of risk)
Taking a “big bath” in a bad year by recording more expense than usual 
so future years are more likely to show higher profitability 

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corporatefinanceinstitute.com
30
The Corporate Finance Institute
Accounting
Financial Accounting 
vs Cost Accounting 
While financial accounting is required by law and mainly performed to 
benefit external users, managerial accounting is not required by law and 
is done to provide useful information to people within an organization, 
mainly management, to make better internal business decisions.
A clear comparison can be seen in the following table: