Explain how adjusting entries provide for potential manipulation by managers.In addition,discuss how compensation arrangements may result in incentives for such manipulation to occur.

Responses will vary to these questions.Managers often receive bonuses based on the strength of a company's financial performance.In addition,stock options are often used as a means of compensation.The higher the company's market value,the more compensation they earn.When actual performance lags behind expectations,managers may be tempted to manipulate accruals and deferrals to make up part or all of the difference.Evidence from academic research as well as SEC investigations indicates that some managers do engage in such behavior.In many of the SEC cases,the firms involved,their managers,and their auditors were penalized for such actions.