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Although prior studies have examined the incentives for executives to engage in earnings management, no prior study has examined whether or not the benefits of different earnings management techniques provide relatively more benefit to the executive or to the company. Our study examines the responses of actual financial executives (e.g., CFOs and vice presidents of finance) and concludes that these executives consider certain earnings management activities to benefit the executive more than the company. Our study also finds that financial executives’ evaluations of the ethicality of selected earnings management activities aligns well with prior research. Further, we find that the actions that financial executives evaluate as being more (less) ethical are also considered to be more (less) likely to be undertaken by their own companies. However, financial executives consider their industry peers to be significantly more likely than their own companies to take all of the earnings management actions in the study. This result may be more self-revelatory than the direct measures, and it indicates an ethical blind spot on the part of financial executives who may perceive themselves to be as an island of ethical behavior in a sea of less ethical competitors.
Eric D. Bostwick, University of West Florida - Pensacola
Patience Constance, University of West Florida