Reporting Concerns About Earnings Quality: An Examination of Corporate Managers

Joseph F. Brazel (), Lorenzo Lucianetti and Tammie J. Schaefer
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Joseph F. Brazel: North Carolina State University
Lorenzo Lucianetti: University of Chieti and Pescara
Tammie J. Schaefer: University of Missouri-Kansas City

Journal of Business Ethics, 2021, vol. 171, issue 3, No 2, 435-457

Abstract: Abstract Using an experiment with corporate financial managers (e.g., CFOs, controllers), we find that when red flags are present in the financial statements under their review, managers identify those red flags and, in turn, have greater concerns over earnings quality. In addition, when pressure to meet a financial target is high, managers are more concerned about earnings quality when red flags are present. We also document that when red flags are present, managers are more likely to report both internally to their CEO and, if their concerns are not resolved internally, externally to their auditor. Pressure to meet a financial target increases the likelihood managers report internally, but decreases their likelihood of reporting externally when red flags are present. Additional analyses document reporting differences between CFOs and controllers, and examine the important roles that short-term personal costs, job tenure, and a non-accounting background play in the ethical dilemma managers face when deciding whether to report externally.

Keywords: Earnings management; Earnings quality; Ethical dilemma; Fraud; Red flags; Reporting; Whistleblowing (search for similar items in EconPapers)
JEL-codes: M40 M41 M48 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1007/s10551-020-04436-1

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