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Impact of CFOs’ Incentives and Earnings


The Impact of CFOs’ Incentives and Earnings Management Ethics on their Financial Reporting Decisions: The Mediating Role of Moral Disengagement

Cathy A. Beaudoin • Anna M. Cianci •

George T. Tsakumis

Received: 23 August 2012 / Accepted: 12 February 2014 / Published online: 7 March 2014

� Springer Science+Business Media Dordrecht 2014

Abstract Despite regulatory reforms aimed at inhibiting

aggressive financial reporting, earnings management per-

sists and continues to concern practitioners, regulators, and

standard setters. To provide insight into this practice and

how to mitigate it, we conduct an experiment to examine

the impact of two independent variables on CFOs’ dis-

cretionary expense accruals. One independent variable,

incentive conflict, is manipulated at two levels (present and

absent)—i.e., the presence or absence of a personal finan-

cial incentive that conflicts with a corporate financial

incentive. The other independent variable is CFOs’ earn-

ings management ethics (‘‘EM-Ethics,’’ high vs. low),

measured as their assessment of the ethicalness of key

earnings management motivations. We find that incentive

conflict and EM-Ethics interact to determine CFOs’ dis-

cretionary accruals such that (a) in the presence of incen-

tive conflict, CFOs with low (high) EM-Ethics tend to give

into (resist) the personal incentive by booking higher

(lower) expense accruals; and (b) in the absence of an

incentive conflict, CFOs with low (high) EM-Ethics tend to

give into (resist) the corporate incentive by booking lower

(higher) expense accruals. We also find support for a

mediated-moderation model in which CFOs’ level of EM-

Ethics influences their moral disengagement tendencies

which, in turn, differentially affect their discretionary

accruals, depending on the presence or absence of incentive

conflict. Theoretical and practical implications of these

findings are discussed.

Keywords Dispositional ethics � Earnings management � Incentives � Moral disengagement


Earnings management involves the manipulation of reve-

nues and/or expenses to obtain a desired financial reporting

outcome (e.g., Ball 2006; Healy and Whalen 1999;

Schipper 1989). This practice has played a role in the

downfall of some major corporations (e.g., Enron and

Sunbeam) and led to a push by the accounting profession

and standard setters for regulatory changes (Elias 2002;

Lawton 2007; SEC 2008). For example, in his 2002 testi-

mony before the UK Parliament Select Committee on

Treasury, International Accounting Standards Board

(IASB) Chair Sir David Tweedie decried the widespread

use of aggressive earnings management (Tweedie 2002).

Similarly in 1998, then Chair of the US Securities and

Exchange Commission (SEC), Arthur Levitt, warned that

earnings management erodes investor confidence and

undermines credibility of the financial markets (Levitt

1998), a view that is also reflected more recently by the

SEC (SEC 2008). However, despite regulatory efforts to

Electronic supplementary material The online version of this article (doi:10.1007/s10551-014-2107-x) contains supplementary material, which is available to authorized users.

C. A. Beaudoin

Accounting Faculty, School of Business Administration,

University of Vermont, Burlington, VT 05405, USA


A. M. Cianci (&) Accounting Faculty, School of Business, Wake Forest

University, Winston Salem, NC 27109, USA


G. T. Tsakumis

Department of Accounting & MIS, Alfred Lerner College of

Business and Economics, University of Delaware, Newark,

DE 19716, USA