Accounting Manipulation, Peer Pressure, and Internal Control

39 Pages Posted: 25 Apr 2016 Last revised: 30 May 2017

See all articles by Pingyang Gao

Pingyang Gao

Booth School of Business, University of Chicago

Gaoqing Zhang

University of Minnesota - Twin Cities - Department of Accounting

Date Written: April 20, 2016

Abstract

We study firms' investment in internal control to reduce accounting manipulation. We first show the peer pressure for manipulation: one manager manipulates more if he suspects reports of peer firms are more likely to be manipulated. As a result, one firm's investment in internal control has a positive externality on peer firms. It reduces its own manager's manipulation, which in turn mitigates the manipulation pressure on managers in peer firms. Firms don't internalize this positive externality and thus under-invest in their internal control over financial reporting. The under-investment problem provides one justification for regulatory intervention in firms' internal control choices.

Keywords: accounting manipulation, peer pressure, internal control, SOX

JEL Classification: G18, M41, M48, K22

Suggested Citation

Gao, Pingyang and Zhang, Gaoqing, Accounting Manipulation, Peer Pressure, and Internal Control (April 20, 2016). 27th Annual Conference on Financial Economics and Accounting Paper, Available at SSRN: https://ssrn.com/abstract=2767829 or http://dx.doi.org/10.2139/ssrn.2767829

Pingyang Gao

Booth School of Business, University of Chicago ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Gaoqing Zhang (Contact Author)

University of Minnesota - Twin Cities - Department of Accounting ( email )

321 19th Avenue South
Minneapolis, MN 55455
United States

HOME PAGE: http://https://carlsonschool.umn.edu/faculty/gaoqing-zhang

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