Secondary Titles (1)
- Alva L. Prickett Chair
Industry Expertise (5)
Areas of Expertise (3)
Educator of the Year (professional)
Granted by Indiana State Society of CPAs.
Indiana University: D.B.A., Accounting 1978
Purdue University: B.S., Industrial Management 1973
In this study we examine the effect of characteristics of the financial reporting environment on the level of financial reporting discretion perceived by managers and the likelihood and method of earnings management. We focus primarily on the effects of financial reporting standards (US GAAP vs. IFRS), while simultaneously considering other important characteristics of the reporting environment and how they interact with the standards—firm domicile, firm ownership, audit quality, firm size, and the direction of the earnings adjustment. Using a web-based case completed by 615 experienced financial officers from the US, Europe and Asia, we find that financial officers under IFRS perceive higher levels of reporting discretion than those under U.S. GAAP, and the perception of higher levels of reporting discretion leads to both a greater likelihood of earnings management and a preference for the use of accruals over real methods. While we generate no evidence that IFRS, compared to U.S. GAAP, leads to a greater likelihood of earnings management, we do observe that U.S. firms under U.S. GAAP show a strong preference for real activities over accruals methods, while all other firms (U.S. firms under IFRS and non-U.S. firms) are either indifferent between the two methods or prefer accruals. We also find that firms adjusting earnings upward strongly prefer real activities, while firms adjusting earnings downward are either indifferent (US GAAP users) or prefer accruals (IFRS users). These findings contribute to research concerning whether differences in financial reporting environments are associated with differences in the perception of allowable reporting discretion, and the inclination to manage earnings via real activities or accruals. They also suggest that adopting IFRS in the US may have little effect on the overall level of earnings management, but instead may encourage firms to substitute accruals for real activities when managing earnings.
In this study we report the results of an experiment that examines how relatively sophisticated financial statement users interpret management stock option compensation disclosures under SFAS No. 123 and SFAS No. 123R. We predict and find that mandated income statement recognition, as required under SFAS No. 123R, leads to higher user assessments of reliability than either voluntary income statement recognition or voluntary footnote disclosure, options allowed under SFAS No. 123. Users view voluntary footnote disclosure as the least reliable reporting alternative. We also examine the amount users invest in response to these accounting treatments, and find that users invest more in a firm when management chooses income statement recognition than when management chooses footnote disclosure. We find no difference in investment amounts between mandated recognition and either voluntary recognition or footnote disclosure. Finally, although we find that these results are insensitive to whether management explicitly disavows the reliability of stock option expense, we present evidence that in side-by-side comparisons, where one firm disavows and the other does not, disavowals may affect user judgments and decisions.
In this study we investigate how the level of discretion in the reporting environment and management's reporting reputation influence the extent to which management's reporting incentives are important in determining the perceived credibility of management's classification choices. Consistent with prior research, we show that users view incentive-inconsistent classifications as more credible than incentive-consistent classifications. We extend this finding by showing that the strength of this relationship (i.e., the extent to which users consider the consistency between the classification and management's reporting incentives) depends on the level of discretion in the reporting environment and management's reporting reputation. We find that users rely less (more) on the consistency between management's reporting incentives and the classification in a mandated (discretionary) reporting environment and when managers have a good (poor) reporting reputation. We conclude by discussing the implications of our findings and potential future research.
In this study we conduct a field experiment to examine how qualifying an income-decreasing accounting change in years of strong financial performance affects user assessments of strategic reporting, current financial performance, and financial performance over the next three years (future performance). We find that without the qualification, users viewed the income-decreasing accounting change as relatively non-strategic, and user assessments of current and future performance were not different. In the presence of the qualification, users believed that the accounting change was relatively strategic, they discounted the income effect of the accounting change, and their assessments of future performance were below their assessments of current performance but no different from the assessments of future performance in the absence of the qualification. While our findings suggest audit qualifications encourage users to be skeptical of income-decreasing accounting changes, we find no evidence that they impose negative consequences on management in terms of lower assessments of financial performance.