The Relation between Internal Forecasting Sophistication and Accounting Misreporting

Journal of Management Accounting Research (2022) 34 (1): 51–73. https://doi.org/10.2308/JMAR-2020-072

Posted: 2 Sep 2021 Last revised: 24 May 2022

See all articles by Peter Kroos

Peter Kroos

University of Amsterdam - Amsterdam Business School

Mario Schabus

Michigan State University

Frank Verbeeten

University of Amsterdam - Faculty of Economics and Business, Amsterdam Business School

Date Written: August 31, 2021

Abstract

We examine the association between internal forecasting sophistication and end-of-the-year accounting misreporting. We draw on survey data from investment center managers of Dutch companies. Consistent with our hypothesis, results suggest that more sophisticated internal forecasting allows firms to reduce their costly accounting misreporting as these firms make more accurate projections and create contingency plans such that they can revise operational plans in a more appropriate and timely manner. Cross-sectional analyses reveal that the benefits in terms of greater forecasting capabilities can vary across conditions. We find that investments in internal forecasting are less effective in reducing the demand for misreporting when environmental volatility is high, when capital market pressure to meet expectations is comparably high, and when within-firm information asymmetry is high. The paper especially speaks to the planning role of budgeting and forecasting, as opposed to the relatively more extensively studied evaluation and incentive role.

Keywords: Budgeting, internal forecasting, internal information quality, accounting misreporting

JEL Classification: M12, M41

Suggested Citation

Kroos, Peter and Schabus, Mario and Verbeeten, Frank H.M., The Relation between Internal Forecasting Sophistication and Accounting Misreporting (August 31, 2021). Journal of Management Accounting Research (2022) 34 (1): 51–73. https://doi.org/10.2308/JMAR-2020-072, Available at SSRN: https://ssrn.com/abstract=3915032

Peter Kroos

University of Amsterdam - Amsterdam Business School ( email )

Plantage Muidergracht 12
Amsterdam, 1018 TV
Netherlands

Mario Schabus (Contact Author)

Michigan State University ( email )

270 North Business Complex
East Lansing, MI 48824-1034
United States

HOME PAGE: http://broad.msu.edu/profile/schabusm/

Frank H.M. Verbeeten

University of Amsterdam - Faculty of Economics and Business, Amsterdam Business School ( email )

Plantage Muidergracht 12
Amsterdam, 1018TV
Netherlands
(+31)0205257391 (Phone)

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