Managers’ Ethical Evaluations of Earnings Management and its Consequences

38 Pages Posted: 28 Jul 2011

See all articles by Eric N. Johnson

Eric N. Johnson

University of Wyoming

Gary Fleischman

University of Wyoming

Sean Valentine

University of North Dakota - College of Business & Public Administration

Kenton B. Walker

University of Wyoming

Date Written: July 28, 2011

Abstract

Despite a recent focus on the ethics of earnings management, research has generally not examined the specific ethical dilemma that arises when a choice to engage in earnings management results in positive organizational consequences. This study focuses on the consequences of earnings management behavior in response to the question: Do the ends of positive organizational consequences justify the means of earnings management?

We investigate manager evaluations of, and reactions to, a scenario in which a hypothetical employee makes a choice whether or not to engage in earnings management behavior, with consequences that are either favorable or unfavorable to the organization. Two hundred and sixty-four experienced managers provided responses to the scenario in a controlled experimental research design. The results indicate that managers may be motivated to discount the ethical impact of earnings management behavior when the consequence has a favorable impact on the organization—implying that the ends justify the means. This finding, in turn, suggests that incrementalism, or the ethical “slippery slope” of overlooking seemingly minor ethical breaches, can undermine efforts to establish a strong ethical tone throughout the organization. Implications of these findings for corporate governance and future research are discussed.

Keywords: earnings management, ethics, consequences, moral intensity

JEL Classification: M41

Suggested Citation

Johnson, Eric N. and Fleischman, Gary and Valentine, Sean and Walker, Kenton B., Managers’ Ethical Evaluations of Earnings Management and its Consequences (July 28, 2011). Contemporary Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1898266

Eric N. Johnson (Contact Author)

University of Wyoming ( email )

Department of Accounting and Finance
College of Business
Laramie, WY 82071
United States

HOME PAGE: http://www.uwyo.edu/accounting/accounting-faculty-and-staff-directory/Eric%20Johnson.html

Gary Fleischman

University of Wyoming ( email )

United States

Sean Valentine

University of North Dakota - College of Business & Public Administration ( email )

Grand Forks, ND 58105
United States

Kenton B. Walker

University of Wyoming ( email )

Dept. 3275
1000 E. University Avenue
Laramie, WY 82071
United States
307-766-3154 (Phone)
307-766-4028 (Fax)

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