Journal: Ethical Issues in Financial Management

User Generated

YnqlTntn

Economics

Description

Instructions

First, read the article The Impact of CFOs' Incentives and Earnings Management Ethics on Their Financial Reporting Decisions: The Mediating Role of Moral Disengagement, and then address the following in a journal assignment:

  • Mitigation: How would you, as CEO/CFO of a publicly traded manufacturing firm, mitigate the potential for serious corporate damage due to ethical and/or legal issues? Explain.
  • Process: What kind of process would you build into operations, culture, policy, and procedures to make sure your firm will not experience any ethical or legal issues?

Be sure to consider the effectiveness and efficiency of your solutions. You might also consider any cost-benefit analysis that might be of interest. Reference the textbook and the article to support your answers.

For additional details, please refer to the Module One Journal Guidelines and Rubric document.

Please write the paper after reading the article and follow the critical elements in the rubric. I definitely check the submitting paper. Thanks.

Unformatted Attachment Preview

J Bus Ethics (2015) 128:505–518 DOI 10.1007/s10551-014-2107-x The Impact of CFOs’ Incentives and Earnings Management Ethics on their Financial Reporting Decisions: The Mediating Role of Moral Disengagement Cathy A. Beaudoin • Anna M. Cianci George T. Tsakumis • Received: 23 August 2012 / Accepted: 12 February 2014 / Published online: 7 March 2014 Ó Springer Science+Business Media Dordrecht 2014 Abstract Despite regulatory reforms aimed at inhibiting aggressive financial reporting, earnings management persists and continues to concern practitioners, regulators, and standard setters. To provide insight into this practice and how to mitigate it, we conduct an experiment to examine the impact of two independent variables on CFOs’ discretionary expense accruals. One independent variable, incentive conflict, is manipulated at two levels (present and absent)—i.e., the presence or absence of a personal financial incentive that conflicts with a corporate financial incentive. The other independent variable is CFOs’ earnings management ethics (‘‘EM-Ethics,’’ high vs. low), measured as their assessment of the ethicalness of key earnings management motivations. We find that incentive conflict and EM-Ethics interact to determine CFOs’ discretionary accruals such that (a) in the presence of incentive conflict, CFOs with low (high) EM-Ethics tend to give into (resist) the personal incentive by booking higher Electronic supplementary material The online version of this article (doi:10.1007/s10551-014-2107-x) contains supplementary material, which is available to authorized users. C. A. Beaudoin Accounting Faculty, School of Business Administration, University of Vermont, Burlington, VT 05405, USA e-mail: Cathy.Beaudoin@uvm.edu A. M. Cianci (&) Accounting Faculty, School of Business, Wake Forest University, Winston Salem, NC 27109, USA e-mail: cianciam@wfu.edu G. T. Tsakumis Department of Accounting & MIS, Alfred Lerner College of Business and Economics, University of Delaware, Newark, DE 19716, USA e-mail: georget@udel.edu (lower) expense accruals; and (b) in the absence of an incentive conflict, CFOs with low (high) EM-Ethics tend to give into (resist) the corporate incentive by booking lower (higher) expense accruals. We also find support for a mediated-moderation model in which CFOs’ level of EMEthics influences their moral disengagement tendencies which, in turn, differentially affect their discretionary accruals, depending on the presence or absence of incentive conflict. Theoretical and practical implications of these findings are discussed. Keywords Dispositional ethics  Earnings management  Incentives  Moral disengagement Introduction Earnings management involves the manipulation of revenues and/or expenses to obtain a desired financial reporting outcome (e.g., Ball 2006; Healy and Whalen 1999; Schipper 1989). This practice has played a role in the downfall of some major corporations (e.g., Enron and Sunbeam) and led to a push by the accounting profession and standard setters for regulatory changes (Elias 2002; Lawton 2007; SEC 2008). For example, in his 2002 testimony before the UK Parliament Select Committee on Treasury, International Accounting Standards Board (IASB) Chair Sir David Tweedie decried the widespread use of aggressive earnings management (Tweedie 2002). Similarly in 1998, then Chair of the US Securities and Exchange Commission (SEC), Arthur Levitt, warned that earnings management erodes investor confidence and undermines credibility of the financial markets (Levitt 1998), a view that is also reflected more recently by the SEC (SEC 2008). However, despite regulatory efforts to 123 506 combat aggressive financial reporting (e.g., Sarbanes–Oxley Act of 2002), earnings management persists and is exacerbated by managers’ incentives (e.g., Cohen et al. 2008; McVay 2006). Thus, it is important to understand earnings management and investigate ways to minimize its potentially dysfunctional effects (SEC 2008). To investigate these issues, we conduct an experiment to examine the joint effect of incentive conflict (i.e., the presence or absence of a personal financial incentive that conflicts with a corporate financial incentive) and chief financial officers’ (hereafter ‘‘CFOs’’) assessments of the ethicalness of key earnings management motivations (hereafter ‘‘EM-Ethics,’’ dichotomized as high or low) on earnings management behavior. In our setting, a personal financial incentive is an incentive to increase current period expenses to maximize bonus potential over a two-year period and a corporate financial incentive is an incentive to minimize expenses to achieve corporate targets. We manipulate incentive conflict, because prior research has found that incentives play an important role in earnings management behavior (Bergstresser and Philippon 2006; Burns and Kedia 2006; Ibrahim and Lloyd 2011).1 Our measure of EM-Ethics, developed specifically for this study, is a fourteen-item construct based on executives’ motivations for managing earnings identified in the seminal survey conducted by Graham et al. (2005). We focus on EM-Ethics, a dispositional measure, because, as suggested by Al-Khatib et al. (2004), the individual is the correct unit of analysis when investigating ethics since it is the individual’s ‘‘personal’’ code of ethics that ultimately influences his/her behavior. This notion is especially relevant to the current context given the varying perspectives on earnings management, with some viewing it as an unethical practice resulting in negative consequences (e.g., Johnson et al. 2012; Kaplan 2001; Vinciguerra and O’Reilly-Allen 2004), while others suggesting that it is an inherent result of the financial reporting process that does not eliminate the usefulness of accounting earnings (e.g., Graham et al. 2005; Lin et al. 2012; Parfet 2000). Further, we examine CFOs’ assessment of EM-Ethics in particular because the CFO is the company’s financial reporting gatekeeper, responsible for approving actions that may lead to earnings management (Levitt 2003) and contributing, along with other executives, to creating a ‘tone at the top’ that shapes the ethical culture and climate within the organization (e.g., Sweeney et al. 2010; Arel et al. 2012). Prior research finds that CFOs make accrual decisions consistent with maximizing their personal incentives (e.g., 1 Additionally, extensive prior research on agency theory provides evidence of the conflicting incentives present in the principal–agent relation (e.g., Ettredge et al. 2013; Fischer and Louis 2008; Pierce 2012). 123 C. A. Beaudoin et al. Cohen et al. 2008; Fields et al. 2001). Our results only provide directional (not statistically significant) support for the expectation that in the presence (absence) of a personal financial incentive that conflicts with a corporate financial incentive, CFOs tend to engage in more (less) self-interested earnings management. However, consistent with our hypotheses, we find that CFOs’ EM-Ethics moderates their willingness to manage earnings under either incentive conflict condition. Specifically, we find that (a) in the presence of a personal financial incentive that conflicts with a corporate financial incentive, CFOs with low (high) EM-Ethics tend to give into (resist) the personal incentive by booking higher (lower) expense accruals; and (b) in the absence of a personal financial incentive that conflicts with a corporate financial incentive, CFOs with low (high) EMEthics tend to give into (resist) the corporate incentive by booking lower (higher) expense accruals. Also consistent with our hypotheses, we find support for a mediatedmoderation effect whereby CFOs’ EM-Ethics significantly influences their propensity to morally disengage morality from their actions and give into incentives. That is, the propensity to morally disengage differentially affects the level of CFOs’ expense accruals depending on their incentives. CFOs with high (low) EM-Ethics are less (more) likely to morally disengage and thus give into a personal financial incentive (i.e., book larger expense accruals) or a corporate financial incentive (i.e., book smaller expense accruals). Our findings contribute to the literature in several ways. First, we provide the first experimental evidence of the joint impact of incentives and dispositional EM-Ethics on CFOs’ earnings management decisions. While prior research has examined incentive contract effects (e.g., Ghosh and Olsen 2009; Healy 1985; Holthausen et al. 1995), no prior studies, to our knowledge, have examined CFOs’ incentives in conjunction with an individual difference variable such as EM-Ethics. Our results suggest that the EM-Ethics/earnings management relation is moderated by the presence or absence of incentive conflict. Second, we develop a dispositional measure (EM-Ethics) and provide experimental evidence of its impact on CFOs’ earnings management behavior. In this way, we extend prior survey research on attitude differences related to the ethical acceptability of earnings management among undergrads, MBAs, and practicing accountants (e.g., Fisher and Rosenzweig 1995; Greenfield et al. 2008; Kaplan et al. 2012). Prior studies examining the link between general individual differences and ethical decision making in business settings provide mixed results (e.g., Carpenter and Reimers 2005; Maroney and McDevitt 2008; Mintchik and Farmer 2009). This stream of literature has not provided evidence that context-specific individual differences are linked to context-specific behavior, which may be an The Impact of CFOs’ Incentives and Earnings Management Ethics explanatory factor of why mixed results have been found in business settings. The current study provides insight into this issue by demonstrating that EM-Ethics, a contextspecific individual difference variable, affects CFOs’ earnings management behavior. Finally, we also provide evidence of how CFOs’ EM-Ethics operates through their propensity to morally disengage. This is consistent with recent research highlighting moral disengagement as an individual cognitive orientation that significantly affects unethical behavior (Moore et al. 2012). Specifically, CFOs’ level of EM-Ethics influences their moral disengagement tendencies which, in turn, differentially affect their discretionary accruals, depending on the presence or absence of incentive conflict. The rest of the paper is organized as follows. The next section reviews relevant literature and presents our hypotheses. In the subsequent sections, we describe our research method and present our results. We conclude with a discussion of the implications and limitations of our research and offer suggestions for future research. Literature Analysis and Hypotheses Development Earnings Management and Incentives Earnings management is one example of an agency cost where the misalignment of interests between the agent (e.g., manager) and principal (e.g., firm, superior, and shareholders) leads the agent to maximize his/her own economic interests at the expense of the principal (Eisenhardt 1989; Jensen and Meckling 1976). One way to manage earnings is to manipulate revenues or expenses by making income-increasing or income-decreasing discretionary accruals (Levitt 1998; Noronha et al. 2008). Managers’ discretionary accruals tend to be income decreasing when managers have incentives to defer earnings and income increasing when managers have incentives to accelerate earnings. Using expenses as an example, management may overestimate costs when the company is profitable and exceeds its financial targets or underestimate costs to maximize earnings in the current period. These actions may be undertaken to avoid falling short of a bonus threshold or earnings target or to improve the issue price around an IPO (Chung et al. 2005; Cohen et al. 2008; Guidry et al. 1999; Healy 1985; Holthausen et al. 1995; Matsunaga and Park 2001; Shaw 2003; Teoh et al. 1998). In an effort to minimize earnings management, organizations may focus on the structure of compensation contracts, which frequently include a base salary plus a cash bonus (Crocker and Slemrod 2007; Evans and Sridhar 1996; Jensen and Meckling 1976; Watts and Zimmerman 1986). A cash bonus can be either fixed as a percentage of salary (i.e., a retention bonus) or variable (i.e., based on the 507 agent achieving certain financial targets).2 In our experimental setting, it is the variable bonus aspect of the compensation contract that provides a personal incentive to manage earnings via self-interested discretionary accruals. For example, if prior to making an expense accrual decision, a CFO knows that projected expenses for the current year are favorable relative to his/her variable bonus targets (i.e., below bonus targets), s/he may record additional discretionary accruals to reduce incurred expenses in the subsequent year, thereby gaming the system to maximize his/her combined two-year bonus payout. Conversely, when bonus targets are guaranteed as a fixed percentage of salary (i.e., personal financial incentives are absent), the CFO’s financial reporting decisions are influenced primarily by the corporate financial targets set by the executive management group (i.e., corporate financial incentives). Thus, the use of accounting discretion to maximize either personal or corporate financial incentives is considered earnings management. In our setting, larger discretionary expense accruals will maximize the potential bonus payout over a 2-year period but will conflict with corporate financial incentives to minimize overall expenses. Thus, we expect that when CFOs have a personal financial incentive that conflicts with a corporate financial incentive, they will book larger discretionary expense accruals than when they don’t have conflicting incentives. That is, we expect CFOs to book larger (smaller) discretionary expense accruals [representative of income-decreasing (increasing) earnings management] when a personal financial incentive that conflicts with a corporate financial incentive is present (absent). This leads to the following hypothesis: H1 In the presence (absence) of a personal financial incentive that conflicts with a corporate financial incentive, CFOs will record larger (smaller) discretionary expense accruals. The Interaction of Incentive Conflict and EM-Ethics Prior earnings management research has primarily focused on earnings management in a capital markets setting, examining the influence of institutional and other factors on its practice, detection, magnitude, and consequences (e.g., Bedard et al. 2004; Habib and Hansen 2008; Fan et al. 2010; Krishnan 2003; Lee 2012; Xiong et al. 2010). Some survey and experimental research have investigated 2 Fixed bonuses are often called ‘‘retention’’ or ‘‘stay’’ bonuses which are used as an incentive to retain key employees (e.g., Phadnis 2013; Scholtes 2009; Smith and Pleven 2009; Lublin 2013). Such bonuses have become increasingly popular (Klaff 2003) with, for example, Yahoo and Starbuck CEOs receiving millions of dollars of such bonuses in recent years (Isidore 2013; Smith 2012). 123 508 earnings management-related attitudes and ethical perceptions of academics, accountants, and students (e.g., Elias 2002; Fisher and Rosenzweig 1995; Greenfield et al. 2008; Kaplan 2001; Kaplan et al. 2012). However, prior research has not examined whether ethical assessments of earnings management are associated with accountants’ earnings management behavior. In the current study, we address this gap in the literature by examining the ethical perceptions of earnings management (i.e., EM-Ethics) and their interactive influence with incentives on CFOs’ earnings management behavior. Perceptions of the ethicalness of earnings management vary. On the one hand, some view earnings management as an unethical practice resulting in negative consequences. For example, some contend that earnings management, ‘‘probably the most important ethical issue facing the accounting profession’’ (Merchant and Rockness 1994, p. 92), obscures true firm value and erodes trust between shareholders and companies (e.g., Graham et al. 2006; Levitt 1998; Loomis 1999; Huang et al. 2008). On the other hand, others suggest that earnings management is a necessary and logical result of the flexibility in financial reporting options, with managers routinely choosing among all options permissible under GAAP in an effort to maximize shareholder value (e.g., Parfet 2000; Chambers and Lacey 1996; Dobson 1999; Dye 1988; Schipper 1989). Further, while many reasons for earning management behavior have been identified by prior research (Graham et al. 2005), assessments of the overall ethicalness of earnings management may vary depending on perceptions underlying its purpose. For instance, prior research suggests that managing earnings for self-interested purposes are perceived as less ethical than managing earnings for the benefit of the company (e.g., Kaplan 2001; Merchant and Rockness 1994). Thus, individuals may differ in their perceptions of the ethicalness of earnings management. According to ethical decision-making models, ethical perceptions are influenced by one’s ethical sensitivity and the context of the judgment/issue and, in turn, these perceptions influence ethical behavior (Jones 1991; Rest 1979; Treviño 1986). Consistent with this notion, accounting research finds that higher levels of ethical reasoning and moral intensity and greater sensitivity to shareholders’ interest are negatively associated with aggressive accounting decisions (e.g., Arel et al. 2012; Maroney and McDevitt 2008; Ponemon 1992). Applying this research to the current context, we suggest that CFOs’ different perceptions of the ethicalness of key earnings management motivations—i.e., their EM-Ethics—will affect their propensity to engage in this practice when they are presented with incentives to do so. 123 C. A. Beaudoin et al. While prior research suggests that both incentives and ethical assessments influence earnings management (e.g., Chung et al. 2005; Greenfield et al. 2008; Guidry et al. 1999; Healy 1985; Kaplan 2001; Kaplan et al. 2012), no research, to our knowledge, has examined the joint effect of these two variables on earnings management behavior. Specifically, prior research indicates that managers use accounting discretion to manage earnings in order to maximize cash bonuses (e.g., Guidry et al. 1999; Healy 1985; Ibrahim and Lloyd 2011) and equity compensation (e.g., Bergstresser and Philippon 2006; Burns and Kedia 2006; Cheng and Warfield 2005). In addition, prior research documents that the perception of the ethicalness of a given issue influences accounting decisions (e.g., Arel et al. 2012; Maroney and McDevitt 2008). However, in the current study, we examine the perceived ethicalness of key earnings management motivations—EM-Ethics—and, to our knowledge, no research has examined the joint effect of incentives and EM-Ethics on earnings management behavior. Per Hypothesis 1, we expect CFOs with a personal financial incentive that conflicts with a corporate financial incentive to record larger discretionary expense accruals than CFOs without such a conflicting incentive. Further, recall that in our setting, corporate incentives are to minimize expenses to help the company meet corporate financial targets, while personal incentives are to shift future period’s expenses into the current year in an effort to maximize their bonus potential over a two-year period. Therefore, we posit that when presented with a personal financial incentive that conflicts with a corporate financial incentive, low (high) EM-Ethics CFOs will record larger (smaller) expense accruals, representative of more (less) self-interested earnings management. When not presented with a conflicting personal financial incentive, CFOs with low (high) EM-Ethics will record smaller (larger) expense accruals, representative of more (less) company-related earnings management. Thus, we expect that high EM-Ethics CFOs will resist giving into either a personal or corporate financial incentive. In contrast, we expect that low EM-Ethics CFOs will give into these incentives and manage earnings accordingly. Based on this discussion, we hypothesize the following interaction: H2 EM-Ethics and incentive conflict will interact such that in the presence (absence) of a personal financial incentive that conflicts with a corporate financial incentive, CFOs with low EM-Ethics will record larger (smaller) discretionary expense accruals as compared to CFOs with high EM-Ethics. The Impact of CFOs’ Incentives and Earnings Management Ethics 509 The Mediating Role of Moral Disengagement We posit that moral disengagement is the mechanism through which the interaction between EM-Ethics and incentives is activated, with high (low) moral disengagement propensity exacerbating (diminishing) earnings management behavior. That is, we expect that CFOs’ EMEthics will significantly influence their tendencies to morally disengage and give into incentives. Moral disengagement propensity will, in turn, differentially affect the level of CFOs’ expense accruals depending on the presence or absence of incentive conflict. Moral disengagement occurs through a set of eight interrelated cognitive mechanisms that allow an individual to disengage self-sanctions that govern his/her behavior (Bandura 1986, 1991, 2002).3 According to Bandura (1999), people adopt moral standards (e.g., ideals and values) which, when activated, serve as self-reactive deterrents for unethical behavior. However, individuals use strategies to rationalize, justify, or downplay their unethical choices—i.e., to disengage their moral standards from their conduct—thereby protecting their self-image, minimizing cognitive distress and allowing them to act unethically (Bandura et al. 1996). Moral disengagement theory has been used to explain why individuals knowingly engage in socially inappropriate/delinquent behaviors (e.g., Moore et al. 2012; Naquin et al. 2010) and what cognitions underlie various self-serving behavior such as corporate wrong doing, corruption, and political violence (e.g., Bandura 1990; Moore 2008). We suggest that an individual’s EM-Ethics is inversely related to their propensity to disengage their personal moral standards from their conduct. For example, CFOs with high 3 Bandura (1999) posits that the following eight cognitive mechanisms facilitate unethical behavior: moral justification (reframing unethical acts as being in support of the greater good—e.g., redefining the morality of killing to justify military action), euphemistic labeling (using sanitized language to rename harmful actions and make them appear more benign—e.g., fired employees described as being given a ‘‘career alternative enhancement’’), advantageous comparison (contrasting the behavior under examination with more reprehensible behavior to make the former seem innocuous—e.g., ‘‘The Vietnam war saved the populace from communist enslavement’’), displacement of responsibility (attribution of personal responsibility to authority figure[s]—e.g., Nazi prison guards claiming they were just carrying out orders), diffusion of responsibility (attribution of personal responsibility across members of a group—e.g., requiring a group decision to get otherwise considerate people to behave unethically), distortion of consequences (minimizing the seriousness of the effects on one’s actions—e.g., moving a person far away from destructive results to weaken the potential injurious effects on that person), dehumanization (framing the victims of one’s actions as undeserving of basic human consideration—e.g., during wartime, nations casting their enemies as ‘‘demons’’ or ‘‘beasts’’), and attribution of blame (assigning responsibility to the victims themselves—e.g., computer hackers explaining that they are forced to hack into government databases because of a villainous government). INCENTIVE CONFLICT MORAL DISENGAGEMENT EM-ETHICS ACCRUAL Fig. 1 Mediated-moderation model EM-Ethics should be generally less willing to view earnings management as an acceptable practice. As a result, high EM-Ethics CFOs will be more likely to activate their own personal moral standards, making it more difficult for them to adopt strategies to rationalize/downplay unethical behavior; in this way, tendencies to morally disengage or deactivate their personal moral standards will be reduced when faced with incentives to manage earnings. Conversely, CFOs with low EM-Ethics should be generally more willing to view earnings management in a favorable light. As a result, low EM-Ethics CFOs will be less likely to activate their own personal moral standards, making it easier for them to adopt strategies to rationalize/downplay unethical behavior; in this way, their personal moral standards and any self-sanctions related to engaging in unethical behavior (including aggressive earnings management) will be disengaged. Thus, we expect CFOs with high (low) EM-Ethics to exhibit lower (higher) tendencies to morally disengage and give into incentive-consistent behavior. In turn, CFOs with lower moral disengagement tendencies will make smaller (larger) expense accruals in the presence (absence) of a personal financial incentive that conflicts with a corporate financial incentive, thereby overriding both personal and company incentives to manage earnings. CFOs with higher moral disengagement tendencies will make larger (smaller) expense accruals in the presence (absence) of a personal financial incentive that conflicts with a corporate financial incentive, thereby pursuing the achievement of both personal and company incentives to manage earnings. This proposed model is presented in Fig. 1.4 This model suggests that CFOs’ EM-Ethics influences their propensity to morally disengage, which in turn differentially affects CFOs’ expense accruals depending on the presence or absence of incentive conflict. We, therefore, hypothesize the following effect: 4 The results and variables presented in Fig. 1 are discussed in the ‘‘Results’’ section. 123 510 H3 Incentive conflict will moderate the relationship between CFOs’ moral disengagement tendencies and their discretionary expense accrual decisions, such that CFOs’ moral disengagement tendencies are influenced by their individual EM-Ethics levels. C. A. Beaudoin et al. Participants are 83 experienced financial statement preparers (i.e., financial officers with the title of CFO or equivalent) with an average of 28.53 years of professional work experience.5 It was important that we select experienced executives (such as these) who play a key role in the financial reporting decisions of their companies since our experiment asks participants to assume the role of a company controller faced with a discretionary expense accrual decision. Of the 83 participants, 65 % have current or prior experience working at publicly traded companies, while 74 % have prior experience working as external auditors. In addition, participants indicated substantial familiarity with the task of recording expense accruals [mean = 6.12 on a seven-point scale (reverse-scored) where 1 represents ‘‘Not at All’’ and 7 represents ‘‘Extremely’’].6 task objective, and post-experimental questionnaire. Participants were told to assume they were the controller for a publicly traded company and asked to consider a year-end accrual decision relating to consulting work that is in process, but for which no billing has yet occurred. Participants in each condition were also reminded by the company that staying focused on controlling current year costs will help the company meet corporate financial targets. Each participant was given the same schedule of services provided by vendors, along with project status information and estimated contract amounts. The total estimated contractual value for these services is $3.3 million. The project status for each vendor was described as in the ‘‘early stages,’’ with estimated completion dates that indicate the projects are expected to be finished within 1 year of their start dates. Participants were informed that they had contacted the vendors in an effort to obtain greater clarity; however, the vendors were unable to provide further details regarding anticipated completion of the contracts. The uncertainty surrounding the project completion date is typical of situations where managers utilize discretion when making accrual decisions. Participants then indicated their accrual recommendation regarding consulting and advisory services that have not yet been billed. Participants also completed demographic and case-related items. Procedure and Task Dependent and Independent Variables Participants were provided with case materials containing company background information, a schedule of unbilled consulting and advisory projects that are in process, the The primary dependent variable is participants’ discretionary expense accrual recommendation. Participants responded to the following dependent variable: ‘‘How much do you recommend be recorded for consulting and advisory services for which you have not yet been billed’’? Participants had the option of recommending that no accrual be made for these services (i.e., $0 recommendation). To test H3, we employ a mediating variable—moral disengagement—which was measured using Moore et al. (2012) eight-item measure of an individual’s propensity to morally disengage (a = .76). Moral disengagement occurs through a set of eight interrelated cognitive mechanisms that allow an individual to disengage self-sanctions that govern his/her behavior (Bandura 1991, 2002). A sample item reads ‘‘Considering the ways people grossly misrepresent themselves, it’s hardly a sin to inflate your own credentials a bit.’’ Participants rated each item on a seven-point scale where 1 = ‘‘Strongly Disagree’’ and 7 = ‘‘Strongly Agree.’’ Thus, the higher the score, the greater an individual’s propensity to morally disengage. Two independent variables (incentive conflict and EMEthics) create a 2 9 2 complete factorial design. As mentioned above, every participant was given a corporate financial incentive to minimize expenses—i.e., participants in each condition were reminded by the company that staying focused on controlling current year costs will help Research Method Participants 5 We mailed instruments to 1,500 individuals identified by the American Institute of Certified Public Accountants as CFOs/financial officers. We received replies from 113 individuals, and 24 were returned as undeliverable. The resulting response rate is 7.66 % (113 responses divided by 1,476 delivered). This response rate is consistent with prior studies involving CFO participants; for instance, Brav et al. 2008 report a 5.3 % rate; Graham and Harvey 2001, p. 191 report a ‘‘nearly 9.0 %’’ rate; and Graham et al. 2005 report an 8.4 % response rate for their unsolicited survey sample. There were 25 unusable responses: sixteen instruments were completed by inappropriately classified individuals such as staff accountants, clerks, and tax accountants (our conclusions remain the same with or without these individuals), and nine were returned with no response on the dependent variable. Thus, 88 usable responses remained. Five of these respondents were excluded in creating one of our main variables of interest. We discuss this process in more detail below. In addition, comparisons of early and late responders indicate no significant differences, suggesting that nonresponse bias does not drive our results. 6 Background variables (e.g., familiarity with recording expense accruals, current or prior experience working at a publicly traded company, and years of professional work experience) are not significantly different between conditions. In addition, when we include these variables in our analyses, they are neither significant nor do they alter the conclusions we draw. 123 The Impact of CFOs’ Incentives and Earnings Management Ethics the company meet corporate financial targets. The presence or absence of incentive conflict was operationalized by providing participants with a personal financial incentive that either conflicted (i.e., a variable bonus) or didn’t conflict (i.e., a fixed bonus) with the corporate financial incentive, respectively.7 Therefore, participants in the incentive conflict absent condition are told that, regardless of any expense entry, they receive a guaranteed fixed bonus of 25 % of base salary ($200,000) in both year 1 and year 2 (the current and following fiscal years, respectively). Thus, there is no conflict between the individual’s personal financial incentive and the company’s incentive to minimize expenses. Similar to the absent condition, participants in the incentive conflict present condition are also provided clarification on the implication of their decision. Specifically, in the incentive conflict present condition, participants’ bonuses vary based on achieving targets for minimizing plant expenses. Bonuses vary as a percentage of base salary ($200,000). In the scenario, projected plant expenses for year 1 ($77.1 million) are $3.0 million below the maximum 40 % bonus target for expenses (i.e., the participant currently qualifies for the largest bonus in year 1). Therefore, participants are told that this cushion gives them the opportunity to record an amount of up to $3,000,000 without jeopardizing any portion of the maximum 40 % bonus for year 1 and increases the likelihood of their receiving a bonus in year 2. Variable bonus targets for year 2 are structured so that projected plant expenses of $83.05 million are $50,000 above the bonus target expense threshold of $83.00 million that would qualify the manager for the minimum 20 % bonus (i.e., the participant currently does not qualify for any bonus in year 2, based on projected expenses). Thus, if a manager decides to make an expense accrual in Year 1, bonus targets become easier to achieve in Year 2. For example, an accrual recommendation of $3.0 million in Year 1 will not only preserve the maximum 40 % bonus in Year 1 but will also help qualify the manager for a 40 % bonus in Year 2, assuming actual Year 2 results are consistent with the current projections. Therefore, there is a personal incentive for managers to recommend higher 7 The purpose of incorporating a variable bonus into an employment contract is to provide a risk-sharing element between the employer and employee, as well as to increase motivation for the employee to put forth maximum effort (Demski and Feltham 1978; Harris and Raviv 1979). Alternatively, incorporating a fixed bonus into an employment contract provides the employee with relief from assuming the risk for uncontrollable events that may impact the firm’s financial performance. Additionally, s/he will not incur any explicit personal cost for decisions made based on their financial statement impact. Use of a fixed bonus also shifts the agent’s focus from achieving financial targets (i.e., ‘‘risk-sharing’’) to fulfilling tenure-based targets (i.e., there is a personal cost to the agent of leaving the firm before fixed bonuses are paid). 511 expense accruals in the current year that can then be used to improve operating results in the following year; this, however, is in conflict with corporate incentives to minimize expenses. The second independent variable, EM-Ethics, is a measured variable that was designed specifically for this study. Consistent with prior research (e.g., Ponemon 1992, 1995; Rutledge and Karim 1999), this variable was dichotomized as either high or low based on participants’ responses to a 14-item construct (see Appendix) based on executives’ motivations for managing earnings highlighted in the seminal survey by Graham et al. (2005). Participants indicated their agreement with each item on a seven-point scale where 1 represents ‘‘Strongly Disagree’’ and 7 indicates ‘‘Strongly Agree.’’ We calculated each individual’s EM-Ethics score by summing their response to the 14 items (a = .96).8 Higher (lower) scores represent a greater (lesser) willingness to manage earnings—i.e., those individuals with low (high) scores are high (low) in EM-Ethics. Consistent with previous research (e.g., Lord and DeZoort 2001; Chang and Yen 2007), the division of participants between high and low levels of EM-Ethics was accomplished by removing five participants at the median. Including these participants in the analysis yields essentially the same results as presented here. Results Manipulation Check and Hypothesis Testing The manipulation check for incentive conflict indicates that participants understood the manipulation. Only one participant incorrectly identified their incentive conflict (i.e., whether their bonus was fixed or variable). Removing this participant from the analyses does not change any of the inferences drawn. Hypotheses 1 and 2 are tested using a 2 9 2 ANOVA in which incentive conflict, EM-Ethics, and their interaction serve as the independent variables and 8 The Cronbach alpha value exceeds the standard for satisfactory scale reliability (i.e., .70; see Kline 1999; Nunnally and Bernstein 1994). To provide further evidence of our scale’s reliability, we conducted several inter-item correlational analyses (untabulated). All of the inter-item correlations are positive, with 89 % of the inter-item correlations significant at p \ .005, 7 % significant at p \ .05, and 4 % significant at p B .10. Further, we assessed the split-half reliability of our scale by adopting an odd–even split of our scale, where the odd-numbered items form one score and the evennumbered items form another score (Davidshofer and Murphy 2005). These two scores show a positive correlation of .933 (p = .0001), providing additional support for the reliability of our scale. Finally, the correlations between each scale item and the total EM-Ethics score (i.e., the item-total correlations) are all positive, significant, and above the .30 internal consistency threshold recommended by Nunnally and Bernstein (1994). 123 512 CFOs’ rank transformation of the expense accrual amount for unbilled consulting and advisory services is the dependent variable.9 Hypothesis 3 is tested using the mediated-moderation procedures recommended by Muller et al. (2005). ANOVA results and cell means are presented in Table 1. Panel A shows that the overall model is significant (F = 2.74, p = .049). C. A. Beaudoin et al. Table 1 ANOVA results and cell means (SD) Overall Model 2.74 0.049 0.012 0.455 0.139 0.710 8.19 0.003 Independent variables Incentive conflict (H1) Interaction Incentive conflict 9 EM-ethics (H2) Hypothesis 1 predicts that CFOs will record larger (smaller) discretionary expense accruals in the presence (absence) of a personal financial incentive that conflicts with a corporate financial incentive. To test H1, we examine the results of the main effect of incentive conflict in our 2 9 2 ANOVA model. Although not significant at conventional levels, Panel B of Table 1 reports results directionally consistent with expectations. Specifically, CFOs’ expense accrual recommendations are higher when incentive conflict is present (mean = $825,162) than when incentive conflict is absent (mean = $692,152). Therefore, H1 is not supported. p valuea Panel A: ANOVAa EM-ethics Test of Hypothesis 1 F statistic EM-ethics Incentive conflict Present Overall Absent Panel B: Cell means (SD) for discretionary expense accrualsb Low High Overall Mean 933,909 496,087 710,133 (SD) (796,132) (427,947) (665,631) n = 45 n = 22 n = 23 Mean 665,667 888,217 800,368 (SD) (1,072,647) (757,073) (887,864) n = 38 n = 15 n = 23 Mean 825,162 692,152 751,446 (SD) (913,785) (639,563) (771,676) n = 37 n = 46 n = 83 Test of Hypothesis 2 a The ANOVA was conducted using the rank of the discretionary expense accrual observations as the dependent variable rather than the actual reported expense amounts, because the actual reported expense amounts are not normally distributed. One-tailed p values are reported where expectations are unidirectional Hypothesis 2 predicts that EM-Ethics and incentive conflict will interact such that in the presence (absence) of a personal financial incentive that conflicts with a corporate financial incentive, CFOs with low EM-Ethics will record larger (smaller) discretionary expense accruals as compared to those with high EM-Ethics. Table 1 reports a significant and directionally consistent interaction between EM-Ethics and incentive conflict in predicting CFOs’ expense accrual amounts (F = 8.19, p = .003), providing support for H2. As expected, nontabulated comparisons within incentive conflict conditions reveal that low (high) EM-Ethics CFOs’ expense accruals are significantly larger (smaller) when incentive conflict is present (F = 3.85, p = .029). When incentive conflict is absent, low (high) EM-Ethics CFOs’ expense accruals are significantly smaller (larger), as expected (F = 4.25, p = .023). Figure 2 depicts a graphical representation of the interaction. 9 Test of Hypothesis 3 Consistent with prior research in accounting (Boylan and Sprinkle 2001) and psychology (Ruwaard et al. 2012; Hutton et al. 2013), we performed our analyses using the ranks of the discretionary expense accrual observations as the dependent variable rather than the reported expense amounts because the reported expense amounts are not normally distributed (which violates one of the assumptions upon which ANOVA and regression are based). Specifically, the Shapiro–Wilk test for normality indicated that the reported expense amounts for each of the four conditions are not normally distributed (all p \ .0001). Additionally, as shown in Table 1, the standard deviations of the reported expense amounts are quite high. Accordingly, an ANOVA conducted using a rank transformation of the reported expense amounts is likely to be more efficient (powerful) and theoretically more appropriate than an ANOVA conducted using the actual reported expense amounts (Conover and Iman 1982; Boylan and Sprinkle 2001). Analyses conducted using the actual reported expense amounts yield results that are qualitatively similar to those reported in the paper. 123 b All participants responded to the following dependent variable: ‘‘How much do you recommend be recorded for consulting and advisory services for which you have not yet been billed’’? The development of H3 is predicated upon the notion that CFOs’ EM-Ethics levels will significantly influence their tendencies to morally disengage and give into incentives. Moral disengagement propensity will, in turn, differentially affect the level of CFOs’ expense accruals depending on the presence or absence of incentive conflict. That is, we expect CFOs with high (low) EM-Ethics to exhibit lower (higher) tendencies to morally disengage and give into incentive-consistent behavior. In turn, CFOs with lower moral disengagement tendencies will make smaller (larger) expense accruals in the presence (absence) of a personal financial incentive that conflicts with a corporate financial incentive, thereby overriding both personal and company The Impact of CFOs’ Incentives and Earnings Management Ethics Fig. 2 Mean accrual amounts for incentive conflict (present and absent) 9 earnings management ethics (EM-Ethics; high and low) incentives to manage earnings. CFOs with higher moral disengagement tendencies will make larger (smaller) expense accruals in the presence (absence) of a personal financial incentive that conflicts with a corporate financial incentive, thereby pursuing the achievement of both personal and company incentives to manage earnings. Consistent with our arguments leading to H3, we find that CFOs with low EM-Ethics exhibit significantly greater moral disengagement propensity than CFOs with high EMEthics (nontabulated means = 13.40 and 10.70, respectively, p = .002, one-tailed). Additionally, we dichotomized moral disengagement to facilitate discussion of the H3 results and more clearly highlight the relation between moral disengagement, incentive conflict, and CFOs’ expense accruals. Consistent with our theoretical development, we find that CFOs with lower moral disengagement tendencies make smaller (larger) expense accruals in the presence (absence) of a personal financial incentive that conflicts with a corporate financial incentive (nontabulated means = 575,882 and 865,950, respectively, p = .14, onetailed), thereby overriding both personal and company incentives to manage earnings. CFOs with higher moral disengagement tendencies make larger (smaller) expense accruals in the presence (absence) of a personal financial incentive that conflicts with a corporate financial incentive (nontabulated means = 823,000 and 560,208, respectively, p = .09, one-tailed), thereby pursuing the achievement of both personal and company incentives to manage earnings. Consistent with prior research (e.g., Shin and Zhou 2007; Grant 2008), we test H3 using the mediated-moderation regression procedures recommended by Muller et al. (2005). According to Muller et al. (2005), three conditions must be met to show that the effect of our mediator (moral disengagement) on our dependent variable 513 (accrual) depends on the moderator (incentive conflict). First, the interaction between the independent variable (EM-Ethics) and moderator (incentive conflict) must significantly predict the dependent variable (accrual) (see Table 2, Eq. 1). Second, the effect of our independent variable (EM-Ethics) must significantly predict the mediator (moral disengagement) (see Table 2, Eq. 2). Third, the interaction between our mediator (moral disengagement) and moderator (incentive conflict) must significantly predict the dependent variable (accrual) while controlling for the mediator and the interaction between the independent variable and moderator (see Table 2, Eq. 3). As a result, the interaction between the independent variable and moderator should be reduced (or not significant in the case of full mediation) in magnitude (b = .237, p = .021, onetailed in Eq. 3 of Table 2) compared to the interaction between the independent variable and moderator shown in the first step (b = .310, p = .003, one-tailed in Eq. 1 of Table 2). A Sobel test recommended by MacKinnon et al. (2002) shows that this decrease is statistically significant (z = 1.78, p = .038, one-tailed). Thus, the overall moderation (incentive conflict) of our independent variable (EM-Ethics) is being partially accounted for by our mediator (moral disengagement). Discussion Aggressive earnings management has played a role in the downfall of some major corporations and continues to concern the accounting profession, standard setters, and regulators (e.g., Elias 2002; SEC 2008). Despite regulator reforms aimed at inhibiting aggressive financial reporting (e.g., Sarbanes–Oxley Act of 2002), earnings management continues to present a challenge to those parties interested in mitigating its potentially dysfunctional effects (e.g., regulators and standard setters). Further, the effectiveness of such regulatory initiatives is adversely affected by managers’ incentives and their propensity to manage earnings (e.g., Cohen et al. 2008; McVay 2006). In the current study, we simultaneously study both dispositional and situational influences on earnings management, thereby shedding light on the interactive nature of earning management behavior. In this way, we provide the first evidence on how a dispositional and situational variable jointly impact CFOs’ earnings management-related judgments. Specifically, our study reports the results of an experiment investigating the effect of incentive conflict and ethical assessments of earnings management on CFOs’ earnings management decisions (i.e., discretionary expense accrual decisions). Prior research finds that CFOs make accrual decisions consistent with maximizing their personal incentives (e.g., 123 514 C. A. Beaudoin et al. Table 2 Regression analyses for mediated moderation (H3) Dependent variable Equation 1 Accrual Independent variables EM-ethics b Incentive conflict (IC)c EM-ethics 9 IC MDd b a t Equation 2 Equation 3 Moral disengagement (MD) Accrual b b t .040 0.37 .312 -.012 -0.11 .059 .310 2.86*** IC 9 MD -.031 3.04*** .58 -.304 t .049 0.43 -.631 -1.86** .237 .025 2.07** 0.21 .664 1.92** ** p \ .05. *** p \ .01 a Accrual is participants’ responses to the following question in their role as controller at HCP: ‘‘How much do you recommend be recorded for consulting and advisory services for which you have not yet been billed’’? Participants had the option of recommending that no accrual be made for these services (i.e., $0 recommendation) b EM-Ethics is a measured variable with two levels (1 = low; -1 = high). This variable was dichotomized as either high or low based on participants’ responses to a fourteen-item construct (see Appendix ) developed specifically for this study and based on the key executive motivations for managing earnings highlighted in the seminal survey conducted by Graham et al. (2005). Participants indicated their agreement with the items on a seven-point scale where 1 represents ‘‘Strongly Disagree’’ and 7 indicates ‘‘Strongly Agree’’ c Incentive Conflict was operationalized by providing participants with a financial incentive that either conflicted with a corporate financial incentive to minimize expenses (variable bonus = 1) or didn’t conflict (fixed bonus = -1) with the corporate financial incentive d Moral Disengagement was measured using Moore et al. (2012) eight-item measure of an individual’s propensity to morally disengage. Moral disengagement occurs through a set of eight interrelated cognitive mechanisms (such as justification, blame attribution, and displacement of responsibility) that allow an individual to disengage self-sanctions that govern his/her behavior (Bandura 1991, 2002). Participants indicated their agreement with the items on a seven-point scale where 1 represents ‘‘Strongly Disagree’’ and 7 indicates ‘‘Strongly Agree.’’ The higher the score, the greater an individual’s propensity to morally disengage Cohen et al. 2008; Fields et al. 2001). Our results only provide directional (not statistically significant) support for the expectation that in the presence (absence) of a personal financial incentive that conflicts with a corporate financial incentive, CFOs tend to engage in more (less) self-interested earnings management. Consistent with our hypotheses, we find that CFOs’ EM-Ethics interacts with incentives to determine their earnings management behavior. Specifically, we find that CFOs with low (high) EM-Ethics tend to give into (resist) the incentives to manage earnings by booking (a) higher (lower) expense accruals in the presence of a personal financial incentive that conflicts with a corporate financial incentive, and (b) lower (higher) expense accruals in the absence of a personal financial incentive that conflicts with a corporate financial incentive. These results show that the influence of both a personal financial incentive and a corporate financial incentive diminishes for high EM-Ethics CFOs, suggesting that a CFO’s ethical predisposition toward earnings management constrains earnings management behavior. Also consistent with our hypotheses, we find support for a mediated-moderation effect whereby CFOs’ EM-Ethics significantly influences their propensity to morally disengage and give into incentives. In turn, moral disengagement propensity differentially affects the level of CFOs’ expense accruals depending on their incentives. Stated differently, the overall moderation (Incentive Conflict) of our independent 123 variable (EM-Ethics) is being partially accounted for by our mediator (moral disengagement). Our results suggest a number of important implications for research and practice. First, our findings suggest that both incentives and ethical perceptions of earnings management play important roles in modeling CFOs’ willingness to engage in earnings management behavior. While prior research along with conventional business wisdom suggests that incentives direct behavior (e.g., Ghosh and Olsen 2009; Healy 1985; Holthausen et al. 1995), our study shows that incentives designed to eliminate self-interested earnings management do not eliminate other incentives to manage earnings. Indeed, our study provides evidence that it is one’s perceptions of the ethicalness of earnings management that has a significant interactive effect with incentives on managing earnings. Further, we extend previous attitudinal research on earnings management (e.g., Fisher and Rosenzweig 1995; Greenfield et al. 2008; Kaplan et al. 2012) by examining the impact of ethical assessments of earnings management on the behavior of CFOs, companies’ top financial reporting decision makers. Considering the attention from regulators, the financial press, and auditors on diminishing earnings management behavior, one may assume that financial executives are less likely to manage earnings. However, our research suggests that experienced financial officers who are low in EM-Ethics (i.e., who perceive that The Impact of CFOs’ Incentives and Earnings Management Ethics 515 behavior is the social norm and been rewarded in the past (Mayer et al. 2009). In this way, the corporate culture— such as one that discourages moral disengagement—may contribute to the integrity of the financial reporting process (Treadway Commission 1987). In addition, prior research has found that moral disengagement levels can be altered by external influences (e.g., Paciello et al. 2008), suggesting that training interventions may be effective at reducing moral disengagement levels. Limitations of our study should be noted. First, the information provided to participants was limited to minimize the time necessary to complete the experimental instrument. Since accounting professionals would have a richer information set in practice when making their decisions, this leaves open the question of external validity and the generalizability of our results. However, this limitation, while noteworthy, is also applicable to most experimental research. Second, highly experienced CFOs participated in the current study. While this is appropriate given the accounting decision task here, we do not know if our results would generalize to less-experienced accounting professionals. Third, the applicability of our EM-Ethics measure has not been used across multiple settings. Therefore, its applicability across different earnings management contexts is an open research question. In addition, future research may focus on further refining EM-Ethics as a useful construct in earnings management research. earnings management is relatively more ethical) manage earnings either in response to personal financial incentives or corporate financial incentives. We also provide evidence that a personal financial incentive or a corporate financial incentive may result in more aggressive earnings management behavior, particularly for CFOs with low EM-Ethics. That is, the findings associated with our individual difference variable (EMEthics) suggest that CFOs appear to constrain their responsiveness to various incentives and, in turn, their earnings management behavior due to the influence of their personal earnings management-related ethical considerations. These results may be of interest to organizations that still employ various incentive contracts (such as variable and fixed bonuses) to motivate behavior. Our results suggest that identifying accounting professionals with high EM-Ethics (rather than simply focusing on the incentive contract employed) may contribute to maintaining a highquality financial reporting environment. Future research is needed to explore various methods to heighten CFOs’ EMEthics. Finally, our results show that the interactive effect of EM-Ethics and incentives on earnings management works through moral disengagement. This finding may be of interest to businesses, professional associations, and educators interested in increasing the ethicalness of the business environment and attenuating earnings management behavior by reducing morally disengaged thinking through intervention, modeling, and training. For instance, through actions and policies, ethical culture and climate within an organization—i.e., the tone at the top—can be shaped by executives (e.g., Sweeney et al. 2010; Arel et al. 2012); these executives, in turn, may act as role models for employees to emulate their behavior, especially if such Appendix Earnings Management Ethics (EM-Ethics) Construct A Items Indicate your agreement with the following statements. Using accounting discretion allowed within GAAP, I am willing to make an accrual… Strongly Disagree a. to benefit shareholders. b. to achieve analysts’ earnings targets. c. to minimize earnings volatility d. to maintain my career trajectory. e. to prevent violation of a debt covenant. f. to achieve corporate earnings targets. g. to protect my professional reputation. h. to preserve or achieve a desired credit rating i. to protect the management team’s external reputation. j. to achieve a personal bonus. k. to increase the value of stock options. l. to control company costs. m. to benefit employees. n. to achieve a team-based bonus. Strongly Agree 1 1 1 1 1 1 1 2 2 2 2 2 2 2 3 3 3 3 3 3 3 4 4 4 4 4 4 4 5 5 5 5 5 5 5 6 6 6 6 6 6 6 7 7 7 7 7 7 7 1 2 3 4 5 6 7 1 1 1 1 1 1 2 2 2 2 2 2 3 3 3 3 3 3 4 4 4 4 4 4 5 5 5 5 5 5 6 6 6 6 6 6 7 7 7 7 7 7 123 516 References Al-Khatib, J. A., Rawwas, M. Y. A., & Vitell, S. J. (2004). Organizational ethics in developing countries: A comparative analysis. Journal of Business, 55, 309–322. Arel, B., Beaudoin, C. A., & Cianci, A. M. (2012). The impact of ethical leadership, the internal audit function, and moral intensity on a financial reporting decision. Journal of Business Ethics, 109, 351–366. Ball, R. (2006). International financial reporting standards (IFRS): Pros and cons for investors. Accounting and Business Research, 36, 5–27. Bandura, A. (1986). Social foundation of thought and action: A social cognitive theory. Englewood Cliffs, NJ: Prentice-Hall. Bandura, A. (1990). Mechanisms of moral disengagement. In W. Reich (Ed.), Origins of terrorism: Psychologies, ideologies, theologies, states of mind (pp. 162–191). Cambridge: Cambridge University Press. Bandura, A. (1991). Social cognitive theory of moral thought and action. In W. M. Kurtines & J. L. Gewirtz (Eds.), Handbook of moral behavior and development (Vol. 1, pp. 45–103). Hillsdale, NJ: Erlbaum. Bandura, A. (1999). Moral disengagement in the preparation of inhumanities. Personal and Social Psychology Review, 3, 193–209. Bandura, A. (2002). Selective moral disengagement in the exercise of moral agency. Journal of Moral Education, 31(2), 101–118. Bandura, A., Barbaranelli, C., Caprara, G. V., & Pastorelli, C. (1996). Mechanisms of moral disengagement in the exercise of moral agency. Journal of Personality and Social Psychology, 71, 364–374. Bedard, J., Chtourou, S. M., & Courteau, L. (2004). The effect of audit committee expertise, independence, and activity on aggressive earnings management. Auditing: A Journal of Practice and Theory, 23(2), 13–35. Bergstresser, D., & Philippon, T. (2006). CEO incentives and earnings management. Journal of Financial Economics, 80(3), 511–529. Boylan, S., & Sprinkle, G. (2001). Experimental evidence on the relation between tax rates and compliance: The effect of earned vs. endowed income. Journal of the American Taxation Association, 23, 75–90. Brav, A., Graham, J., Campbell, H., & Michaely, R. (2008). The effect of the May 2003 dividend tax cut on corporate dividend policy: Empirical and survey evidence. National Tax Journal, 61, 381–396. Burns, N., & Kedia, S. (2006). The impact of performance-based compensation on misreporting. Journal of Financial Economics, 79(1), 35–67. Carpenter, T. D., & Reimers, J. L. (2005). Unethical and fraudulent reporting: Applying the theory of planned behavior. Journal of Business Ethics, 60, 115–129. Chambers, D. R., & Lacey, N. J. (1996). Corporate ethics and shareholder wealth maximization. Journal of the Financial Management Association, 6, 93–96. Chang, C. J., & Yen, S. H. (2007). The effects of moral development and adverse selection conditions on managers’ project continuance decisions: A study in the pacific-rim region. Journal of Business Ethics, 76, 347–360. Cheng, Q., & Warfield, T. D. (2005). Equity incentives and earnings management. The Accounting Review, 80(2), 441–476. Chung, R., Firth, M., & Kim, J. B. (2005). Earnings management, surplus free cash flow, and external monitoring. Journal of Business Research, 58, 766–776. Cohen, D. A., Dey, A., & Lys, T. Z. (2008). Real and accrual-based earnings manipulations in the pre- and post- Sarbanes-Oxley periods. The Accounting Review, 83, 757–787. 123 C. A. Beaudoin et al. Conover, W. L., & Iman, R. L. (1982). Analysis of covariance using the rank transformation. Biometrics, 38, 715–724. Crocker, K. J., & Slemrod, J. (2007). The economics of earnings manipulation and managerial compensation. RAND Journal of Economics, 38, 698–713. Davidshofer, K. R., & Murphy, C. O. (2005). Psychological testing: Principles and applications (6th ed.). Upper Saddle River, N.J.: Pearson/Prentice Hall. Demski, J. S., & Feltham, G. A. (1978). Economic incentives in budgetary control systems. Accounting Review, 53, 336–359. Dobson, J. (1999). Is shareholder wealth maximization immoral? Financial Analysts Journal, 55, 69–75. Ruwaard J., Lange A., Broeksteeg J., Renteria-Agirre A., Schrieken B., Dolan, C. V., & Emmelkamp P. (2012). Online cognitive behavioural treatment of bulimic symptoms: A randomized controlled trial. Clinical Psychology and Psychotherapy, epub ahead of print. doi: 10.1002/cpp.1767. Dye, R. A. (1988). Earning management in an overlapping generations model. Journal of Accounting Research, 26, 195–235. Eisenhardt, K. M. (1989). Agency theory: An assessment and review. Academy of Management Review, 14, 57–74. Elias, R. (2002). Determinants of earnings management ethics among accountants. Journal of Business Ethics, 40(1), 35–45. Ettredge, M., Huang, Y., & Zhang, W. (2013). Restatement disclosures and management earnings forecasts. Accounting Horizons, 27(2), 347–369. Evans, J. H, III, & Sridhar, S. S. (1996). Multiple control systems, accrual accounting, and earnings management. Journal of Accounting Research, 34, 45–65. Fan, Y., Barua, A., Cready, W. M., & Thomas, W. B. (2010). Managing earnings using classification shifting: Evidence from quarterly special items. The Accounting Review, 85(4), 1303–1323. Fields, T. D., Lys, T. Z., & Vincent, L. (2001). Empirical research on accounting choice. Journal of Accounting and Economics, 31, 255–307. Fischer, P. E., & Louis, H. (2008). Financial reporting and conflicting managerial incentives: The case of management buyouts. Management Science, 54(10), 1700–1714. Fisher, M., & Rosenzweig, K. (1995). Attitudes of students and accounting practitioners concerning the ethical acceptability of earnings management. Journal of Business Ethics, 14, 433–444. Ghosh, D., & Olsen, L. (2009). Environmental uncertainty and managers’ use of discretionary accruals. Accounting, Organizations and Society, 34, 188–205. Graham, J. R., & Harvey, C. R. (2001). The theory and practice of corporate finance: Evidence from the field. Journal of Financial Economics, 60, 187–243. Graham, J. R., Harvey, C. R., & Rajgopal, S. (2005). The economic implications of corporate financial reporting. Journal of Accounting and Economics, 40, 3–73. Graham, J. R., Harvey, C. R., & Rajgopal, S. (2006). Value destruction and financial reporting decisions. Financial Analysts Journal, 62(6), 27–39. Grant, A. M. (2008). Does intrinsic motivation fuel the prosocial fire? Motivational synergy in predicting persistence, performance, and productivity. Journal of Applied Psychology, 93, 48–58. Greenfield, A. C., Norman, C. S., & Wier, B. (2008). The effect of ethical orientation and professional commitment on earnings management behavior. Journal of Business Ethics, 83, 419–434. Guidry, F., Leone, A. J., & Rock, S. (1999). Earnings-based bonus plans and earnings management by business-unit managers. Journal of Accounting and Economics, 26, 113–142. Habib, A., & Hansen, J. C. (2008). Target shooting: Review of earnings management around earnings benchmarks. Journal of Accounting Literature, 27, 25–70. The Impact of CFOs’ Incentives and Earnings Management Ethics Harris, M., & Raviv, A. (1979). Optimal incentive contracts with imperfect information. Journal of Economic Theory, 20, 23–259. Healy, P. M. (1985). The effect of bonus schemes on accounting decisions. Journal of Accounting and Economics, 7, 85–107. Healy, P. M., & Whalen, J. M. (1999). A review of the earning management literature and its implications for standard setting. Accounting Horizons, 13, 365–383. Holthausen, R. W., Larcker, D. F., & Sloan, R. G. (1995). Annual bonus schemes and the manipulation of earnings. Journal of Accounting and Economics, 19, 29–74. Huang, P., Louwers, T. J., Moffitt, J. S., & Zhang, Y. (2008). Ethical management, corporate governance, and abnormal accruals. Journal of Business Ethics, 83(3), 469–487. Hutton, P., Kelly, J., Lowens, I., Taylor, P. J., & Tai, S. (2013). Selfattacking and self-reassurance in persecutory delusions: A comparison of healthy, depressed and paranoid individuals. Psychiatry Research, 205(1/2), 127–136. Ibrahim, S., & Lloyd, C. (2011). The association between nonfinancial performance measures in executive compensation contracts and earnings management. Journal of Accounting and Public Policy, 30(3), 256–274. Isidore, C. (2013). Yahoo’s Mayer gets $1.1 million bonus. @CNNMoneyTech March 7. Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3, 305–360. Johnson, E., Fleishman, G., Valentine, S., & Walker, K. (2012). Managers’ ethical evaluations of earnings management and its consequences. Contemporary Accounting Research, 29(3), 910–927. Jones, T. M. (1991). Ethical decision making by individuals in organizations: An issue-contingent model. Academy of Management Review, 2, 366–395. Kaplan, S. (2001). Ethically related judgments by observers of earnings management. Journal of Business Ethics, 32(4), 285–298. Kaplan, S. N., Klebanov, M. M., & Sorensen, M. (2012). Which CEO characteristics and abilities matter? The Journal of Finance, 67(3), 973–1007. Kline, P. (1999). The handbook of psychological testing (2nd ed.). Routledge: London. Krishnan, G. (2003). Does Big 6 auditor industry expertise constrain earnings management? Accounting Horizons, 17, 1–16. Lawton, C. (2007). Dell gets back to basics after audit-panel probe. Wall Street Journal, 250(47), A2. Lee, L. F. (2012). Incentives to inflate reported cash from operations using classification and timing. The Accounting Review, 87(1), 1–33. Levitt, A. (1998). The numbers game. The CPA Journal, 68, 14–19. Levitt, A. (2003). You are the guardians. CFO Magazine, May 1. Lin, B., Lu, R., & Zhang, T. (2012). Tax-induced earnings management in emerging markets: Evidence from china. The Journal of the American Taxation Association, 34(2), 19–44. Loomis, C. J. (1999). Lies, damned lies, and managed earnings. Fortune, 140, 74–92. Lord, A., & DeZoort, F. T. (2001). The impact of commitment and moral reasoning on auditors: Responses to social influence pressure. Accounting, Organizations and Society, 26(3), 215–235. Lublin, J. (2013). CEO pay survey: What’s a CEO worth? More companies answer $10 million. The Wall Street Journal, B1, May 16. MacKinnon, D. P., Lockwood, C. M., Hoffman, J. M., West, S. G., & Sheets, V. (2002). A comparison of methods to test mediation and other intervening variable effects. Psychological Methods, 7, 83–104. Maroney, J. J., & McDevitt, R. E. (2008). The effects of moral reasoning on financial reporting decisions in a post SarbanesOxley environment. Behavioral Research in Accounting, 20, 89–110. 517 Matsunaga, S. R., & Park, C. W. (2001). The effect of missing a quarterly benchmark on the CEO’s annual bonus. The Accounting Review, 76, 313–332. Mayer, D. M., Kuenzi, M., Greenbaum, R., Bardes, M., & Salvador, R. (2009). How low does ethical leadership flow? Test of a trickle-down model. Organizational Behavior and Human Decision Processes, 108, 1–13. McVay, S. E. (2006). Earnings management using classification shifting: An examination of core earnings and special items. The Accounting Review, 81, 501–531. Merchant, K., & Rockness, J. (1994). The morality of managing earnings: An empirical test. Journal of Accounting and Public Policy, 13, 79–94. Mintchik, N. M., & Farmer, T. A. (2009). Associations between epistemological beliefs and moral reasoning: Evidence from accounting. Journal of Business Ethics, 84, 259–275. Moore, C. (2008). Moral disengagement in processes of organizational corruption. Journal of Business Ethics, 80, 129–139. Moore, C., Detert, J. R., Treviño, L. K., Baker, V. L., & Mayer, D. M. (2012). Why employees do bad things: Moral disengagement and unethical organizational behavior. Personnel Psychology, 65, 1–48. Muller, D., Judd, C. M., & Yzerbyt, V. Y. (2005). When moderation is mediated and mediation is moderated. Journal of Personality and Social Psychology, 89, 852–863. Naquin, C. E., Kurtzberg, T. R., & Belkin, L. Y. (2010). The finer points of lying online: E-mail versus pen and paper. Journal of Applied Psychology, 95(2), 387–394. Noronha, C., Zeng, Y., & Vinten, G. (2008). Earnings management in China: An exploratory study. Managerial Auditing Journal, 23, 367–385. Nunnally, J. C., & Bernstein, I. H. (1994). Psychometric theory (3rd ed.). New York, NY: McGraw-Hill. Paciello, M., Fida, R., Tramontano, C., Lupinetti, C., & Caprara, G. V. (2008). Stability and change of moral disengagement and its impact on aggression and violence in late adolescence. Child Development, 79, 1288–1309. Parfet, W. U. (2000). Accounting subjectivity and earnings management: A preparer perspective. Accounting Horizons, 14, 481–488. Phadnis, S. (2013). iGate gives large retention bonuses to top executives. The Economic Times, July 25. Pierce, L. (2012). Organizational structure and the limits of knowledge sharing: Incentive conflict and agency in car leasing. Management Science, 58(6), 1106–1121. Ponemon, L. (1992). Accountant underreporting and moral reasoning: An experimental lab study. Contemporary Accounting Review, 9, 171–189. Ponemon, L. (1995). The objectivity of accountants’ litigation support judgments. Accounting Review, 70(3), 467–488. Rest, J. (1979). Development in judging moral issues. Minneapolis, MN: University of Minnesota Press. Rutledge, R. W., & Karim, K. E. (1999). The influence of self-interest and ethical considerations on managers’ evaluation judgments. Accounting Organization and Society, 24, 173–184. Sarbanes-Oxley Act of 2002. Public Law No. 107–204[H.R.3763]. Washington, D.C.: Government Printing Office. Schipper, K. (1989). Commentary on earnings management. Accounting Horizons, 3, 91–102. Scholtes, S. (2009). Fannie May to pay retention awards. Financial Times, March 19th: 6. Securities and Exchange Commission (SEC). (2008). Final report of the advisory committee on improvements to financial reporting to the United States Securities and Exchange Commission. Available at http://www.sec.gov/about/offices/oca/acifr/acifrfinalreport.pdf 123 518 Shaw, K. (2003). Corporate disclosure quality, earnings smoothing, and earnings’ timeliness. Journal of Business Research, 56(12), 1043–1050. Shin, S., & Zhou, J. (2007). When is educational specialization heterogeneity related to creativity in research and development teams? Transformational leadership as a moderator. Journal of Applied Psychology, 92, 1709–1721. Smith, A. (2012). Starbucks CEO Schultz made $65 million. @CNNMoney, January 27. Smith, R., & Pleven, L. (2009). US News: Lawyer at center of troubled unit got top bonus. The Wall Street Journal, 253(65), A6. Sweeney, B., Arnold, D., & Pierce, B. (2010). The impact of perceived ethical culture of the firm and demographic variables on auditors’ ethical evaluation and intention to act decisions. Journal of Business Ethics, 93, 531–551. Teoh, S. H., Welch, I., & Wong, T. J. (1998). Earnings management and the long-run market performance of initial public offerings. Journal of Finance, 53, 1935–1974. 123 C. A. Beaudoin et al. Treadway Commission. (1987). Report of the national commission on fraudulent financial reporting. Washington, DC: National Commission on Fraudulent Financial Reporting. Treviño, L. K. (1986). Ethical decision making in organizations: A person-situation interactionist model. Academy of Management Review, 11, 601–617. Tweedie, D. (2002). The UK Parliament Select Committee on Treasury. UK: House of Commons. Vinciguerra, B., & O’Reilly-Allen, M. (2004). An examination of factors influencing managers’ and auditors’ assessments of the appropriateness of an accounting treatment and earnings management intentions. American Business Review, 22(1), 78–87. Watts, R. L., & Zimmerman, J. L. (1986). Positive accounting theory. Englewood Cliffs, NJ: Prentice Hall. Xiong, Y., Zhou, H., & Varshney, S. (2010). The economic profitability of pre-IPO earnings management and IPO underperformance. Journal of Economics and Finance, 34(3), 229–256. Copyright of Journal of Business Ethics is the property of Springer Science & Business Media B.V. and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. Module One Journal Guidelines and Rubric In this course, the journal will be used for reflection. Journal activities in this course are private between you and the instructor. Overview: For this journal task, you will consider how you, as the CEO/CFO of a publicly traded manufacturing firm, would mitigate the potential for serious corporate damage as a result of ethical or legal mismanagement. Prompt: First, read the article The Impact of CFOs' Incentives and Earnings Management Ethics on Their Financial Reporting Decisions: The Mediating Role of Moral Disengagement, and then address the following in a two- to three-paragraph journal assignment: • • Mitigation: How would you, as CEO/CFO of a publicly traded manufacturing firm, mitigate the potential for serious corporate damage due to ethical and/or legal issues? Explain. Process: What kind of process would you build into operations, culture, policy, and procedures to make sure your firm will not experience any ethical or legal issues? Be sure to consider the effectiveness and efficiency of your solutions. You might also consider any cost-benefit analysis that might be of interest. Reference the textbook and the article to support your answers. Rubric Guidelines for Submission: Submit assignment as a Word document with double spacing, 12-point Times New Roman font, and one-inch margins. Your journal assignment should be two to three paragraphs in length. Critical Elements Mitigation Proficient (100%) Explains how serious corporate damage would be mitigated in the scenario Process Describes the process that would be built into operations, culture, policy, and procedures to make sure the firm will not experience ethical and legal issues Articulation of Response Journal is free of errors in organization and grammar Needs Improvement (75%) Explains how serious corporate damage would be mitigated in the scenario, but explanation is cursory or lacking in detail Describes the process that would be built into operations, culture, policy, and procedures to make sure the firm will not experience ethical and legal issues, but description is cursory or lacking in detail Journal contains errors of organization and grammar, but they are limited enough that submission can be understood Not Evident (0%) Does not explain how serious corporate damage would be mitigated in the scenario Value 40 Does not describe the process that would be built into operations, culture, policy, and procedures to make sure the firm will not experience ethical and legal issues 40 Journal contains errors of organization and grammar that make the journal difficult to understand 20 Total 100%
Purchase answer to see full attachment
User generated content is uploaded by users for the purposes of learning and should be used following Studypool's honor code & terms of service.

Explanation & Answer

...


Anonymous
Just the thing I needed, saved me a lot of time.

Studypool
4.7
Trustpilot
4.5
Sitejabber
4.4

Similar Content

Related Tags