Study Links Earnings Manipulation to Success in Corporate Accounting
10 August 2015
Accounting Today Online
Willingness to manipulate earnings helps individuals succeed in corporate accounting, according to a new academic study. The study’s authors contend that individuals who ascend to positions of authority in corporate accounting are predisposed by their personality and values to manage earnings and are hired and promoted for that very reason.
The study, from Scott Jackson, Ling Harris and Joel Owens of the University of South Carolina’s Darla Moore School of Business, is being presented this week at the annual meeting of the American Accounting Association, August 7-12 in Chicago.
The researchers lacked access to employment files and instead based their study on surveys of accounting and finance executives and executive-recruitment professionals. The professors polled 56 accounting and finance executives and 41 executive-recruitment professionals. The executives, approximately 55 percent of whom are male, held titles indicating a high level of professional achievement, such as chief financial officer, chief accounting officer, and controller. Recruiters, about 64 percent male, had an average work experience of about 23 years and had been involved in an average of about 520 executive searches and 400 searches in accounting or finance.
The study concluded that “the job candidate whose personality characteristics signal a predisposition to manage earnings is much more likely to be hired in for-profit public companies. Further … executive recruitment professionals indicate that the job candidate whose personality characteristics signal an aversion to earnings management is likely to be screened out before even being considered by prospective employers.”
When presented a choice between two candidates for a senior corporate accounting position who were similar in background and credentials, 87.5 percent of the accounting and finance executives surveyed chose the candidate who was clearly more congenial to earnings management. Seasoned recruiting professionals rated that candidate’s fitness for the job at 81 percent and the fitness of the more ethically upright rival at only 35 percent.
“We couldn’t help but be surprised by the overwhelming consensus in favor of a candidate whom study participants considered inferior in just about every aspect of management except the ability to remove roadblocks to reporting a profit,” said Jackson in a statement.
According to the study, the winning candidate “is characterized by a constellation of negative personality characteristics, which participants apparently accept in order to hire the job candidate who appears predisposed to manage earnings.”
Participants were asked to take the role of an executive of or a recruiter for a publicly traded manufacturing company searching for a successor to the firm’s recently retired senior accounting manager, who oversaw accounting operations and made important decisions with respect to financial reporting. The company’s financial objectives, participants were informed, include 1) achieving profit goals, 2) maintaining smooth earnings, 3) avoiding earning volatility, and 4) maintaining low cost of capital, goals similar to those commonly enunciated by financial executives. Two finalists for the position have quite similar education and employment backgrounds but sharply contrasting values, including these:
- Candidate A is “results-oriented” and willing to “rewrite the rules if necessary to achieve goals,” while Candidate B is “process-oriented” and believes rules “should not be circumvented to achieve goals and should be changed only after significant deliberation.”
- Candidate A looks to the “norms of the organization…to determine what behavior is acceptable,” while Candidate B “has rigid beliefs about what constitutes acceptable behavior and rarely deviates from those beliefs.”
- Candidate A “believes that leadership achievements require the ability to please those in positions of power,” while Candidate B believes “leadership achievements are chiefly due to being in the right place at the right time.”
- Candidate A “can find justifications for actions after the fact,” while Candidate B “prefers to avoid” doing so.
Asked which candidate the company would most likely hire, seven eighths of the executives selected Candidate A, who had been judged by a different group of accounting and finance professionals to be significantly more prone than Candidate B to engage in earnings management. And, when recruiting professionals were asked their degree of certainty that one or the other finalist would be a good fit for the company, they were, on average, 81 percent certain about Candidate A and only 35 percent certain about Candidate B.
To explore the possibility that such judgments might reflect a sense that Candidate A was simply a better manager than Candidate B, the professors carried out another survey with different participants.
This group was presented the same descriptions of the candidates that the executives and recruiters received and was asked to agree or disagree with six reasons why one might have been chosen over the other: 1) would provide more constructive feedback to staff; 2) would maintain staff morale better; 3) would be better at planning accounting department activities; 4) would work more efficiently; 5) would be more pleasant; 6) would be more likely to remove any roadblocks to profit goals. Of the six, Candidate A was judged superior only on the last, while Candidate B excelled in the first, second, fourth, and fifth.
In short, the losing job candidate was deemed superior on four of six management measures, with the preferred candidate judged better only at what amounted to willingness to manage earnings (even though the researchers took care not to state that outright).The point was further reinforced by still another survey in which participants were asked to rate the same two candidates’ fitness to serve as senior financial officer of a nonprofit foundation. With profit no longer in the picture, Candidate B was chosen hands down.
The researchers doubt that regulation can make headway against a selection process as deeply ingrained as the study reveals this to be.
“Hopefully, showing that people and their values are at the root of this problem will help,” said Jackson. “Companies commonly shine a spotlight on particular employees to demonstrate commitment to good corporate citizenship. Certainly the proven ethical integrity of a firm’s financial leadership should be a powerful selling point to the investment community.”
THE CORPORATE CULTURE OF EARNINGS MANIPULATION
But all the software in the world can’t help a company strengthen its financial data accuracy if corporate culture does not support it.
That’s the conclusion of a new research report conducted by University of South Carolina accounting experts. The study was presented at the American Accounting Association’s annual meeting, which concludes Wednesday (Aug. 12). Findings paint a not-so-pretty picture about the state of transparency in some corporate treasury departments.
In a survey of 41 executive recruiters and 56 accounting executives, researchers found that accounting professionals are more likely to be hired by a corporation if they express a willingness to fudge or tweak financial data in an effort to present a businesses’ finances in a more positive light.
The report’s authors — University of South Carolina Darla Moore School of Business professors Scott Jackson, Ling Harris and Joel Owens — concluded that when choosing a new hire, the individual picked by a recruiter “is characterized by a constellation of negative personality characteristics, which participants apparently accept in order to hire the job candidate who appears predisposed to manage earnings.”
Candidates that are more willing to manage earnings data are “much more likely to be hired in for-profit public companies,” the study found.
These conclusions were drawn from the survey, the results of which found that nearly 88 percent of participants, who were asked to choose between two potential new hires with similar professional backgrounds but contrasting values, chose the candidates with values that supported a willingness to bend the rules or fudge financial data for the purpose of achieving corporate goals.
Survey participants were asked to put themselves in a position of a recruiter for a public manufacturing firm looking to hire a new senior accounting manager.
Candidate A was described as willing to “rewrite the rules if necessary to achieve goals,” looks to a company’s existing corporate culture to determine acceptable behavior, believes in the importance of pleasing officials in a position of power, and “can find justifications for actions after the fact.”
Candidate B, on the other hand, believed rules “should not be circumvented to achieve goals,” held “rigid beliefs” about what is right and wrong in a corporation, and “prefers to avoid” justifying actions after the fact.
Candidate A held characteristics that a separate group of professionals found to suggest a willingness to manage earnings data. In a separate survey, the researchers found that Candidate B was considered to hold qualities of a better manager and a better fit for a nonprofit organization’s accounting team.
According to reports in Reuters, accounting researchers have speculated that this type of pattern among corporate recruiters has existed, and that employees that are willing to manipulate the numbers are more likely to succeed at their companies.
U.S. regulators, Reuters said, have been particularly concerned over earnings management. For example, reports touched on the practice of setting aside funds to cover potential litigation, then using those funds to “smooth their reported profit.” But according to the research report, “no amount of regulation may significantly curtail earnings management under such circumstances.”
In a statement announcing the findings, Jackson expressed shock at the implications of his research. “We couldn’t help but be surprised by the overwhelming consensus in favor of a candidate whom study participants considered inferior in just about every aspect of management except the ability to remove roadblocks to reporting a profit,” he said.
The study emerges in a market climate in which stricter regulations and high-tech accounting Software-as-a-Service tools give corporate treasury professionals the ability to more accurately report financial data.
“In the changing regulatory and reporting landscape, being able to quickly and efficiently extract insights from data has become a necessity rather than a luxury,” declared a recent report from Treasury and Risk. “Corporate treasury and finance managers are coming under increasing pressure to adapt their reporting processes and infrastructure to take advantage of the ‘big data’ their organization is collecting.”
From cash flow visibility dashboards to travel and expense management services, innovators are introducing new ways to automate and collect data from a corporation’s finances. But according to the research from Jackson and his colleagues, these tools are not enough to combat corporate accounting inaccuracies.
Instead, it’s an issue that stems straight from corporate culture and the values of individual employees, the researchers found.
“Hopefully, showing that people and their values are at the root of this problem will help,” Jackson said.
Earnings manipulation key to accounting success
The most successful corporate accountants are those most willing to manage earnings, study finds
A WILLINGNESS to manipulate company earnings is key to success in corporate accounting, a study by the American Accounting Association has suggested.
According to the paper, presented at the association’s annual meeting this week, the most successful corporate accountants are those most willing to manage earnings, and are hired and promoted for that reason.
“Executive recruitment professionals indicate that the job candidate whose personality characteristics signal an aversion to earnings management is likely to be screened out before even being considered by prospective employers,” the study said.
When presented a choice between two candidates for a senior corporate accounting position who were similar in background and credentials, 87.5% of accounting and finance executives chose the candidate who was clearly more congenial to earnings management. Seasoned recruiting professionals rated that candidate’s fitness for the job at 81% and the fitness of the more ethically upright rival at only 35%.
“We couldn’t help but be surprised by the overwhelming consensus in favour of a candidate whom study participants considered inferior in just about every aspect of management except the ability to remove roadblocks to reporting a profit,” said Scott Jackson of the University of South Carolina‘s Darla Moore School of Business, who conducted the study with colleagues Ling Harris and Joel Owens.