When Executives Pledge Integrity: The Effect of the Accountant’s Oath on Firms’ Financial Reporting

Abstract

We study the effect of executives’ pledges of integrity on firms’ financial reporting outcomes by exploiting a 2016 regulation that requires holders of Dutch professional accounting degrees to pledge an integrity oath. We identify chief executive officers (CEOs) and chief financial officers (CFOs) required to take the integrity oath, and find that firms reduce income-increasing discretionary accruals after executives took the oath. These firms also reduce discretionary expenditures, indicating that oath-taking executives reduce overall earnings management and not merely substitute accruals-based with real-activities earnings management. These effects are concentrated in firms where the CFO took the oath. Overall, our results indicate that integrity oaths for executives improve firms’ financial reporting quality.

Keywords: Professional Oath, Financial Reporting, Accounting Quality, Accruals-Based Earnings Management, Rationalization of Fraud, Real-Activities Earnings Management.

JEL Classification: M40, M41