Two recent academic studies reveal surprising trends in earnings management and manipulation at for-profit companies. The first study, conducted by Scott Jackson, Ling Harris and Joel Owens of the University of South Carolina’s Darla Moore School of Business, suggests that executives are much more likely to hire job candidates who exhibit a predisposition to manage earnings. Specifically, 87.5 percent of surveyed accounting and finance executives picked a candidate who was clearly more willing to mislead stakeholders.
Accounting Today cited Jackson as follows:
“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.”
There are clear, legal ways to manage earnings such as asset disposal and well-timed acquisitions, but practices cross the line into earnings manipulation without strong oversight. According to new research, companies are more likely to aggressively manipulate their numbers when peer companies exhibit the same behavior.
The New York Times highlighted the work of three academics, Simi Kedia, Kevin Koh, and Shivaram Rajgopal, who examined this relationship. Journalist Gretchen Morgenson summarizes their findings as follows: “After one company was found to have misstated its earnings, the study determined, others in its industry often followed suit and began massaging their own numbers, ultimately resulting in their own restatements.”
In other words, earnings manipulation correlated with the percentage of firms in the same region or industry that had restated their earnings in the 12 months prior. The bigger and more impactful the original book-cooker, the more likely that other companies would copy the misconduct.