Although an organization's environmental uncertainty may induce greater variability in reported earnings, managers have incentives to reduce this variability.
The results highlight the importance of investor protection for financial reporting quality and the need for regulators to design mechanisms that limit managers' earnings management practices.
Interestingly, the conditions that engender greater earnings management also paradoxically increase managers' perceived unethicality of the anticipated earnings management.
For example, Kuang (2008) examines the impact of performance-vested stock options on the likelihood of earnings management, and finds that managers are more likely to engage in earnings management when they hold a larger amount of performance-vested stock options.
We also find, after controlling for the underlying ethical disposition of managers, that the different audit procedures and attitudes conveyed to management affect managers' perceptions of the ethicality of anticipated earnings management.
Managers in the airline industry were inclined to engage in income increasing earnings management after deregulation.
This study examines whether different audit procedures and attitudes conveyed to management deter aggressive earnings management that may be fraudulent, and whether such different procedures and attitudes conveyed influence managers' perceptions about the ethicality of any anticipated earnings management.
"Mark Frevert said, 'Before, cash flow wasn't important, it was always earnings,' " a manager on the trading desk who attended the meeting said.
Boards can pay managers to magically beat quarterly earnings estimates or pay them to build sound, sustainable organizations.
"It is the earnings of managers, sales representatives, lawyers and doctors that have caused college-educated earnings to rise," says Educational Testing Service's Carnevale.
