Real Earnings Management in Sales
34 Pages Posted: 16 Jul 2016 Last revised: 16 Dec 2019
Date Written: October 21, 2016
We surveyed 1,638 sales executives across 40 countries regarding their companies’ likelihood of asking sales to perform real earnings management (REM) actions when earnings pressure exists. Using this information, which we refer to as companies’ REM propensities, we study how company characteristics and environmental conditions relate to the responses received. The use of cash-ﬂow incentives for sales personnel and the distribution of interfunctional power in favor of ﬁnance rather than sales are both associated with companies’ REM propensities. In addition, we show that sales executives preemptively change their behaviors in anticipation of top management’s REM requests. Sales executives working for public companies and companies in the United States reported higher levels of REM propensity. The data also support an association between REM propensity and ﬁnance–sales conﬂict. These ﬁndings and others are compared and contrasted with existing empirical and survey-based research on REM throughout the paper.
Keywords: ﬁnancial accounting, disclosure, incentives, transparency, earnings management
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