The Beneficiaries of Earnings Management and Ethical Blind Spots

• In Event: Earnings Management, Investments & Corporate Fraud

Abstract

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 both the perceived ethicality and the perceived beneficiary of earnings management activities have an effect of the likelihood that a financial executive will undertake those activities. Financial executives also demonstrate an ethical blind spot with respect to earnings management activities. Specifically, they are more likely to undertake certain earnings management activities than would be expected from their own ethical perception of the appropriateness of those activities; and they consider their industry peers to be significantly more likely than their own companies to undertake certain earnings management activities. This result may be more self-revelatory than the direct measures.

Authors

• Eric D. Bostwick, University of West Florida - Pensacola

• Patience Constance, University of West Florida - Pensacola