The Impact of CFOs’ Incentives and Earnings Management Ethics on Their Financial Reporting Decisions: The Mediating Role of Moral Disengagement

39 Pages Posted: 18 Oct 2012 Last revised: 13 Feb 2014

See all articles by Cathy Beaudoin

Cathy Beaudoin

University of Vermont

Anna Cianci

Wake Forest University

George T. Tsakumis

University of Delaware - Alfred Lerner College of Business and Economics

Date Written: September 27, 2013

Abstract

Despite regulatory reforms aimed at inhibiting aggressive financial reporting, earnings management persists and continues to concern practitioners, regulators, and standard setters. To provide insight into this practice and how to mitigate it, we conduct an experiment to examine the impact of two independent variables on CFOs’ discretionary expense accruals. One independent variable, incentive conflict, is manipulated at two levels (present, absent) – i.e., the presence or absence of a personal financial incentive that conflicts with a corporate financial incentive. The other independent variable is CFOs' earnings management ethics (“EM-Ethics”, high vs. low), measured as their assessment of the ethicalness of key earnings management motivations. We find that incentive conflict and EM-Ethics interact to determine CFOs’ discretionary accruals such that (a) in the presence of incentive conflict, CFOs with low (high) EM-Ethics tend to give in to(resist) the personal incentive by booking higher (lower) expense accruals; and (b) in the absence of an incentive conflict, CFOs with low (high) EM-Ethics tend to give in to (resist) the corporate incentive by booking lower (higher) expense accruals. We also find support for a mediated-moderation model in which CFOs’ level of EM-Ethics influences their moral disengagement tendencies which, in turn, differentially affect their discretionary accruals, depending on the presence or absence of incentive conflict. Theoretical and practical implications of these findings are discussed.

Keywords: earnings management, incentives, moral disengagement, dispositional ethicalness, ethics

JEL Classification: M40, M41

Suggested Citation

Beaudoin, Cathy and Cianci, Anna and Tsakumis, George T., The Impact of CFOs’ Incentives and Earnings Management Ethics on Their Financial Reporting Decisions: The Mediating Role of Moral Disengagement (September 27, 2013). Journal of Business Ethics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2163797 or http://dx.doi.org/10.2139/ssrn.2163797

Cathy Beaudoin

University of Vermont ( email )

212 Kalkin Hall
Burlington, VT 05405-0158
United States

Anna Cianci

Wake Forest University ( email )

2601 Wake Forest Road
Winston-Salem, NC 27109
United States

George T. Tsakumis (Contact Author)

University of Delaware - Alfred Lerner College of Business and Economics ( email )

419 Purnell Hall
Newark, DE 19716
United States

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