CFOs' Incentives and Earnings Management Ethics Impact on their Financial Decisions

Essay from the year 2015 in the subject Art - Arts Management, , language: English, abstract: Despite the regulatory reforms targeted at limiting aggressive earnings management and financial reporting continues to be a major concern of the regulators, standards setters and the industry practitioners. To bring the practice to light and offer mitigative solutions, the paper carries out an experiment to investigate the impact of two independent variables on the discretionary CFO's expense control. Incentive conflict, one of the independent variable is manipulated at two different levels (past and present). EM-Ethics (earnings management ethics) is the other CFOs independent variable (low vs. high). And it is measured as the CFOs assessment of the ethicalness of the primary earnings management motivations. We discover that the EM-Ethics and incentive conflict interact to determine the discretionary accruals for the CFOs such that (a) when the incentive conflict is absent, the CFOs with high (low) EM-Ethics do tend to resist (give in) the corporate incentive through booking higher (lower) expense accrual. (b) when the incentive conflict is absent, the CFOs with (high) low EM-Ethics do tend to resist (give into) the incentive through booking (lower) higher expense accruals. The practical and theoretical implications of the research findings are discussed.