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

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  • Cathy Beaudoin
  • Anna Cianci
  • George Tsakumis

Abstract

Despite regulatory reforms aimed at inhibiting aggressive financial reporting, earnings management persists 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’ discretionary expense accruals. One independent variable, incentive conflict, is manipulated at two levels (present and absent)—i.e., the presence or absence of a personal financial incentive that conflicts with a corporate financial incentive. The other independent variable is CFOs’ earnings 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’ discretionary accruals such that (a) in the presence of incentive 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. Copyright Springer Science+Business Media Dordrecht 2015

Suggested Citation

  • Cathy Beaudoin & Anna Cianci & George Tsakumis, 2015. "The Impact of CFOs’ Incentives and Earnings Management Ethics on their Financial Reporting Decisions: The Mediating Role of Moral Disengagement," Journal of Business Ethics, Springer, vol. 128(3), pages 505-518, May.
  • Handle: RePEc:kap:jbuset:v:128:y:2015:i:3:p:505-518
    DOI: 10.1007/s10551-014-2107-x
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    3. Pan, Xiaozhen & Tang, Hongfei, 2021. "Are both managerial morality and talent important to firm performance? Evidence from Chinese public firms," International Review of Financial Analysis, Elsevier, vol. 73(C).
    4. Joseph F. Brazel & Lorenzo Lucianetti & Tammie J. Schaefer, 2021. "Reporting Concerns About Earnings Quality: An Examination of Corporate Managers," Journal of Business Ethics, Springer, vol. 171(3), pages 435-457, July.
    5. Krista Fiolleau & Steven E. Kaplan, 2017. "Recognizing Ethical Issues: An Examination of Practicing Industry Accountants and Accounting Students," Journal of Business Ethics, Springer, vol. 142(2), pages 259-276, May.
    6. Niklas Egels-Zandén, 2017. "Responsibility Boundaries in Global Value Chains: Supplier Audit Prioritizations and Moral Disengagement Among Swedish Firms," Journal of Business Ethics, Springer, vol. 146(3), pages 515-528, December.
    7. Li Yu (Colly) He & Sue Wright & Elaine Evans, 2018. "Is fair value information relevant to investment decision-making: Evidence from the Australian agricultural sector?," Australian Journal of Management, Australian School of Business, vol. 43(4), pages 555-574, November.
    8. Ashley Nicole West & Gary M. Fleischman, 2023. "The Roles of Cynicism, CFO Pressure, and Moral Disengagement on FIN 48 Earnings Management," Journal of Business Ethics, Springer, vol. 185(3), pages 545-562, July.
    9. Plöckinger, Martin & Aschauer, Ewald & Hiebl, Martin R.W. & Rohatschek, Roman, 2016. "The influence of individual executives on corporate financial reporting: A review and outlook from the perspective of upper echelons theory," Journal of Accounting Literature, Elsevier, vol. 37(C), pages 55-75.
    10. Alexander Newman & Huong Le & Andrea North-Samardzic & Michael Cohen, 2020. "Moral Disengagement at Work: A Review and Research Agenda," Journal of Business Ethics, Springer, vol. 167(3), pages 535-570, December.
    11. Mehdi Nekhili & Fahim Javed & Haithem Nagati, 2022. "Audit Partner Gender, Leadership and Ethics: The Case of Earnings Management," Journal of Business Ethics, Springer, vol. 177(2), pages 233-260, May.
    12. Matthew Valle & K. Michele Kacmar & Suzanne Zivnuska, 2019. "Understanding the Effects of Political Environments on Unethical Behavior in Organizations," Journal of Business Ethics, Springer, vol. 156(1), pages 173-188, April.
    13. Nourhene BenYoussef & Saqib Khan, 2018. "Timing of earnings restatements: CEO equity compensation and market reaction," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 58(2), pages 341-365, June.

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