scholarly journals The Attenuating Effect of Intelligent Agents and Agent Autonomy on Managers' Ability to Diffuse Responsibility for and Engage in Earnings Management

2020 ◽  
Vol 34 (4) ◽  
pp. 143-164
Author(s):  
Peter C. Kipp ◽  
Mary B. Curtis ◽  
Ziyin Li
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Intelligent Agents ◽  
Autonomous Agents ◽  
Ethical Conduct ◽  
Human Agent ◽  
Perception Of Control ◽  
Reporting Decisions ◽  
Aggressive Financial Reporting

SYNOPSIS Advances in IT suggest that computerized intelligent agents (IAs) may soon occupy many roles that presently employ human agents. A significant concern is the ethical conduct of those who use IAs, including their possible utilization by managers to engage in earnings management. We investigate how financial reporting decisions are affected when they are supported by the work of an IA versus a human agent, with varying autonomy. In an experiment with experienced managers, we vary agent type (human versus IA) and autonomy (more versus less), finding that managers engage in less aggressive financial reporting decisions with IAs than with human agents, and engage in less aggressive reporting decisions with less autonomous agents than with more autonomous agents. Managers' perception of control over their agent and ability to diffuse their own responsibility for financial reporting decisions explain the effect of agent type and autonomy on managers' financial reporting decisions.

Baywatch International: A Case Linking Financial-Reporting, Business, and User Decisions

2000 ◽  
Vol 15 (4) ◽  
pp. 605-633 ◽  
Author(s):  
Fred Phillips ◽  
Kevin Morris ◽  
Kristina Zvinakis
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Financial Accounting ◽  
Financial Statement ◽  
Technical Knowledge ◽  
Capital Asset ◽  
Financial Statement Analysis ◽  
Accounting Courses ◽  
Reporting Decisions ◽  
Asset Depreciation

Baywatch International is a hypothetical company that manufactures figure-enhancement products—a rapidly growing industry that is featured frequently in Fortune and on CNNfn. The executives at Baywatch are making financial-reporting decisions pertaining to the company's receivables, inventories, loss contingencies, and capital asset depreciation. These decisions require technical knowledge of fundamental topics covered in introductory financial accounting courses, as well as an appreciation for relationships among financial-reporting, business, and user decisions. Consideration of the implications for financial statement analysis, earnings management, and financial-reporting ethics also is encouraged.

The Effect of Real Earnings Management on Auditor Scrutiny of Management's Other Financial Reporting Decisions

2018 ◽  
Vol 93 (5) ◽  
pp. 145-163 ◽  
Author(s):  
Benjamin P. Commerford ◽  
Richard C. Hatfield ◽  
Richard W. Houston
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Real Earnings Management ◽  
Financial Statement ◽  
Mediation Model ◽  
Reporting Decisions ◽  
Regulatory Scrutiny ◽  
Serial Mediation ◽  
Subjective Estimates ◽  
Inference Theory

ABSTRACT Recent research reveals that accruals-based earnings management (AEM) is decreasing while real earnings management (REM) is increasing, suggesting the correlation is due to regulatory scrutiny. However, based on Correspondent Inference Theory, we predict and find that when management uses REM, auditors are more restrictive of management's subjective estimates, making it more difficult for management to use income-increasing AEM. Our experiment manipulates the presence versus absence of REM, and whether the audit difference potentially impacts the client's ability to meet an earnings target. Using a serial mediation model, we find that when auditors observe REM, they perceive these operating decisions as aggressive, leading them to perceive management as aggressive, ultimately causing greater proposed adjustments on an unrelated audit difference. We contribute to the literature by demonstrating that when auditors observe REM, their altered perceptions about management can cascade, affecting how they respond to management estimates in unrelated financial statement accounts.

The effects of a public indicator of accounting aggressiveness on managers’ financial reporting decisions

2019 ◽  
Vol 34 (8) ◽  
pp. 986-1007 ◽  
Author(s):  
Erin L. Hamilton ◽  
Rina M. Hirsch ◽  
Jason T. Rasso ◽  
Uday S. Murthy
Keyword(s):  
High Risk ◽  
Earnings Management ◽  
Financial Reporting ◽  
Risk Scores ◽  
Content Type ◽  
Accounting Choices ◽  
Best Estimate ◽  
Reporting Decisions ◽  
Public Risk ◽  
Risk Metric

Purpose The purpose of this paper is to examine how publicly available accounting risk metrics influence the aggressiveness of managers’ discretionary accounting decisions by making those decisions more transparent to the public. Design/methodology/approach The experiment used a 2 × 3 between-participants design, randomly assigning 122 financial reporting managers among conditions in which we manipulated whether the company was currently beating or missing analysts’ consensus earnings forecast and whether an accounting risk metric was indicative of low risk, high risk or a control. Participants chose whether to manage company earnings by deciding whether to report an amount of discretionary accruals that was consistent with the “best estimate” (i.e. no earnings management) or an amount above or below the best estimate. Findings Aggressive (income-increasing) earnings management is deterred when managers believe such behavior will cause their firm to be flagged as aggressive (i.e. high risk) by an accounting risk metric. Some managers attempt to “manage” the risk metric into an acceptable range through conservative (income-decreasing) earnings management. These results suggest that by making the aggressiveness of accounting choices more transparent, public risk metrics may reduce one type of earnings management (income-increasing), while simultaneously increasing another (income-decreasing). Research limitations/implications The operationalization of the manipulated variables of interest may limit the study’s generalizability. Practical implications Users of accounting risk metrics (e.g. investors, auditors, regulators) should be cautious when relying on such risk metrics that may be of limited reliability and usefulness due to managers’ incentives to manipulate their companies’ risk scores by being overly conservative in an effort to prevent being labeled “aggressive”. Originality/value By increasing the transparency of the aggressiveness of accounting choices, public risk metrics may reduce one type of earnings management (income-increasing), while simultaneously increasing another (income-decreasing).

scholarly journals Financial reporting incentives: Taxation and external financing need

2020 ◽  
Vol 12 (1) ◽  
pp. 57-69
Author(s):  
Nino Serdarević ◽  
Ajla Muratović-Dedić
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Tax Burden ◽  
External Financing ◽  
Financial Reports ◽  
Debt Contracting ◽  
Taxable Income ◽  
Conservative Accounting ◽  
Reporting Incentives ◽  
Aggressive Financial Reporting

Earnings management literature extensively explores tax regime and debt contracting as possible incentives in financial reporting. Firms engage with aggressive financial reporting to bias earnings in periods when the need for external financing increases. Contrary to this, the tax burden represents incentive for more conservative reporting. We argue that the level of firm's financial reporting aggressiveness is not constant but rather floating from period to period, directly affecting the quality of financial reports. We assume that firm's management on its own discretion determines the level of conservatism, balancing between these two incentives. The prevailing of two incentives, the need for external financing and the tax burden, determines the level of conservatism in particular reporting period. We hypothesised that the reduction in tax burden incentive overcomes the debt contracting incentive in the years of decreasing external financing need, implying more conservative accounting to balance between economic and taxable income. The total accruals are used as a measure of earnings management reflected to working capital accruals. The data analysis conducted on financial reports of 297 firms in the time-series of five years shows a significant correlation between total accruals, external financing needs and difference between economic and taxable income.

The Impact of Going Concern on Financial Reporting Quality: Evidence from Vietnam

2018 ◽  
Vol 34 (3) ◽  
Author(s):  
Phung Anh Thu ◽  
Nguyen Vinh Khuong
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Financial Distress ◽  
Reporting Quality ◽  
Financial Reporting Quality ◽  
Viet Nam ◽  
Listed Firms ◽  
Going Concern ◽  
Debt Covenant

The investigation was conducted to contribute empirical evidence of the association between going concern and financial reporting quality of listed firms on the Vietnam stock market. Based on data from 279 companies listed on the HNX and HOSE exchanges in Vietnam for the period 2009-2015, the quantitative research. Results found that the relationship between the going concern and financial reporting quality of listed firms. Research results are significant for investors, regulators to the transparency of financial reporting information. Keywords Going concern, financial reporting quality, listed firms References Agrawal, K., & Chatterjee, C. (2015). Earnings management and financial distress: Evidence from India. Global Business Review, 16(5_suppl), 140S-154S.Bergstresser, D., & Philippon, T. (2006). CEO incentives and earnings management. Journal of Financial Economics, 80(3), 511–529.Burgstahler, D., & Dichev, I. (1997). Earnings management to avoid earnings decreases and losses. Journal of Accounting and Economics, 24(1), 99–126.Charitou, A., Lambertides, N., & Trigeorgis, L. (2007a). Earnings behaviour of financially distressed firms: The role of institutional ownership. Abacus, 43(3), 271–296.Chen, Y., Chen, C., & Huang, S. (2010). An appraisal of financially distressed companies’ earnings management: Evidence from listed companies in China. Pacific Accounting Review, 22(1), 22–41Dechow, P., & Dichev, I. (2002). The Quality of Accruals and Earnings: The Role of Accrual Estimation Errors. The Accounting Review, 77, 35-59.DeFond, M., & Jiambalvo, J. (1994). Debt covenant violation and manipulation of accruals. Journal of Accounting and Economics, 17(1), 145–176.DeFond, M.L., & Park, C.W. (1997). Smoothing income in anticipation of future earnings. Journal of Accounting and Economics, 23(2), 115–139.Dichev, I., & Skinner, D. (2004). Large sample evidence on the debt covenant hypothesis. Journal of Accounting Research, 40(4), 1091–1123.Đinh Thị Thu T., Nguyễn Vĩnh K. (2016). Tác động của hành vi điều chỉnh thu nhập đến khả năng hoạt động liên tục trong kế toán: Nghiên cứu thực nghiệm cho các doanh nghiệp niêm yết tại Việt Nam, Tạp chí phát triển khoa học và công nghệ, Quí 3, tr.96-108.Đỗ Thị Vân Trang (2015). Các mô hình đánh giá chất lượng báo cáo tài chính, Tạp chí chứng khoán Việt Nam, 200, tr 18-21.Habib, A., Uddin Bhuiyan, B., & Islam, A. (2013). Financial distress, earnings management and market pricing of accruals during the global financial crisis. Managerial Finance, 39(2), 155-180.Jaggi, B., & Lee, P. (2002). Earnings management response to debt covenant violations and debt restructuring. Journal of Accounting, Auditing & Finance, 17(4), 295–324.Kasznik, R., (1999). On the association between voluntary disclosure and earnings management. Journal of accounting research, 37(1), pp.57-81.Lu, J. (1999). An empirical study of earnings management by loss-making listed Chinese companies. KuaijiYanjiu (Accounting Research), (9), 25–35.McNichols, M.F. and Stubben, S.R., (2008). Does earnings management affect firms’ investment decisions?. The accounting review, 83(6), pp.1571-1603.Selahudin, N.F., Zakaria, N.B., & Sanusi, Z.M. (2014). Remodelling the earnings management with the appear- ance of leverage, financial distress and free cash flow: Malaysia and Thailand evidences. Journal of Applied Sciences, 14(21), 2644–2661.Skinner, D.J., & Sloan, R. (2002). Earnings surprises, growth expectations, and stock returns or don’t let an earnings torpedo sink your portfolio. Review of Accounting Studies, 7(2/3), 289–312.Sweeney, A.P., (1994). Debt-covenant violations and managers' accounting responses. Journal of Accounting & Economics, 17(3): 281-308.Trần Thị Thùy Linh, Mai Hoàng Hạnh (2015). Chất lượng báo cáo tài chính và kỳ hạn nợ ảnh hưởng đến hiệu quả hoạt động của doanh nghiệp Việt Nam, Tạp chí phát triển kinh tế, 10, tr.27-50.Trương Thị Thùy Dương (2017). Nâng cao chất lượng báo cáo tài chính công ty đại chúng, Tạp chí tài chính, 1(3), tr.55-56.Uwuigbe, Ranti, Bernard, (2015). Assessment of the effects of firm’s characteristics on earnings management of listed firms in Nigeria, Asian Economic and Financial Review,5(2):218-228.

scholarly journals The impact of IFRS-based accounting standards on earnings management: evidence from Malaysia

2016 ◽  
Vol 5 (1) ◽  
pp. 1
Author(s):  
Yosra Makni Fourati ◽  
Rania Chakroun Ghorbel
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Emerging Market ◽  
Accounting Standards ◽  
Absolute Value ◽  
Financial Reporting Standards ◽  
Ifrs Adoption ◽  
Earning Quality ◽  
The Impact ◽  
Different Levels

This study aims to examine the consequences of International Financial Reporting Standards (IFRS) convergence in an emerging market. More specifically, we investigate whether the adoption of the new set of accounting standards in Malaysia is associated with lower earnings management. Using a sample of 3,340 firm-year observations across three reporting periods with different levels of IFRS adoption, we provide evidence that IFRS convergence improves earning quality. In particular, we find a significant decrease in the absolute value of discretionary acccruals in the partial IFRS-convergence period (2007-2011), whereas this effect is restrictive after the complete IFRS- implementation.

Corporate social responsibility and earnings management in the EU: a panel data analysis approach

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Panagiotis E. Dimitropoulos
Keyword(s):  
Corporate Social Responsibility ◽  
Panel Data ◽  
Social Responsibility ◽  
Earnings Management ◽  
Financial Reporting ◽  
Negative Association ◽  
Content Type ◽  
Corporate Social ◽  
The Eu

Purpose Over the past decades, corporate social responsibility (CSR) has been considered as a significant corporate strategy and also has been documented as a main information dissemination mechanism of corporations to shareholders, creditors and other external stakeholders. This fact makes the CSR activities and CSR performance interconnected with the quality of firms’ financial reporting. The purpose of this paper is to study the impact of CSR performance on the earnings management (EM) behaviour using a sample from 24 European Union (EU) countries summing up to 121,154 firm-year observations over the period 2003–2018. Design/methodology/approach The study uses a multi-country data set with various dimensions of CSR performance including indexes regarding workforce, community relations, product responsibility and human rights protection. The empirical analysis is conducted with panel data regressions. Findings Evidence supports the negative association between CSR and EM indicating that high CSR performing firms are associated with less income smoothing and discretionary accruals, thus with higher financial reporting quality. Practical implications Regulatory agencies in the EU could use the findings of the study for the improvement of the accounting framework via enhancing the use and publications of social and environmental responsibility information and reports. Social implications Also, the current paper could be of interest not only to academic researchers but also to potential and existing investors in European corporations. The negative association between CSR performance and EM could be used by investors in assessing the risk of firms and the quality and reliability of their financial information. Originality/value This is the first study within the EU, which considers the multi-facet characteristics of CSR on the quality of accounting earnings and offers useful policy implications for regulators and investors.

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