Reporting Concerns about Earnings Quality: An Examination of Corporate Managers
61 Pages Posted: 26 Nov 2016 Last revised: 29 Dec 2019
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Reporting Concerns about Earnings Quality: An Examination of Corporate Managers
Reporting Concerns about Earnings Quality: An Examination of Corporate Managers
Date Written: December 28, 2019
Abstract
Using an experiment with corporate financial managers (e.g., CFOs, controllers), we find that when red flags are present in the financial statements under their review, managers identify those red flags and, in turn, have greater concerns over earnings quality. In addition, when pressure to meet a financial target is high, managers are more concerned about earnings quality when red flags are present. We also document that when red flags are present, managers are more likely to report both internally to their CEO and, if their concerns are not resolved internally, externally to their auditor. Pressure to meet a financial target directly influenced the decision to report internally, but not externally. Additional analyses document the important roles short-term personal costs, job tenure, and a non-accounting background play in the ethical dilemma managers face when deciding whether to report externally. Last, when pressure is low, we observe that CFOs are less apt to respond to red flags than other corporate managers (e.g., controllers, financial accounting managers).
Keywords: Earnings Management, Earnings Quality, Fraud, Red Flags, Reporting, Whistleblowing
JEL Classification: M41
Suggested Citation: Suggested Citation