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
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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).
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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
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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).
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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.
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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.
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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.
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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
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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%
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