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
Introduction
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
e-mail: Cathy.Beaudoin@uvm.edu
A. M. Cianci (&) Accounting Faculty, School of Business, Wake Forest
University, Winston Salem, NC 27109, USA
e-mail: cianciam@wfu.edu
G. T. Tsakumis
Department of Accounting & MIS, Alfred Lerner College of
Business and Economics, University of Delaware, Newark,
DE 19716, USA
e-mail: georget@udel.edu