Abstract
Earnings management has become an issue of critical importance in today's financial markets, receiving wide publicity by the press and scrutiny from the Securities Exchange Commission (SEC) and Financial Accounting Standards Board (FASB). Earnings management is the intentional misstatement of earnings that would have been different in the absence of any manipulation. In general, earnings management is considered to be when managers make decisions not for strategic reasons but solely to change earnings. Management of earnings may be focused on meeting quarterly earnings expectations, instead of being strategically focused. Depending on a company's risk management strategy, earnings from a particular project or financial transaction can be more volatile in the near term than over the life of the transaction. Often, earnings volatility and long-term value creation are tradeoffs. This article proposes a simplistic measurement of hedge effectiveness to be used to evaluate operational decisions to determine the extent to which it will create current earnings volatility.