Real Earnings Management in Sales, the Interaction with Finance and Appearance in Financial Reports

• In Event: Methodologies in Earnings Management Research

Abstract

We conduct a comprehensive survey of sales leaders to determine the specific nature of real earnings management behaviors in the sales function. We find that sales leaders are more likely to be asked to manage expenses over revenues. Requests to do so come from CEOs and CFOs more frequently than from COOs and Board Members. The linkage between earnings management in the sales and finance functions is strong. Earnings management requests are closely related to: (i) the finance department’s involvement in strategy development; (ii) the level of earnings management the finance department engages in; and, perhaps consequently, (iii) the level of conflict between the sales and finance departments. Results also suggest that members of the sales function are somewhat rational; when they anticipate interference later in the fiscal year, they change behaviors earlier in the same year to mitigate the impact. Finally, comparisons with financial ratios show that firms most suspected of earnings management have slightly higher receivables and payables, but lower gross margins consistent with a “channel stuffing” or end-of-year “push” strategy and worse stock market performance over one- and five- year periods.

Authors

• Craig James Chapman, Northwestern University

• Michael Ahearne, University of Houston

• Jeff Boichuk, University of Houston

• Thomas Steenburgh, University of Virginia