The Corporate Culture Of Earnings Manipulation

Innovators of corporate treasury and finance management solutions have brought businesses access to a new level of transparency. Automated accounting solutions, data capture and electronic processes, industry experts say, can all help to boost compliance and lead to greater assurance that financial reports display accurate information.

But all the software in the world can’t help a company strengthen its financial data accuracy if corporate culture does not support it.

That’s the conclusion of a new research report conducted by University of South Carolina accounting experts. The study was presented at the American Accounting Association’s annual meeting, which concludes Wednesday (Aug. 12). Findings paint a not-so-pretty picture about the state of transparency in some corporate treasury departments.

In a survey of 41 executive recruiters and 56 accounting executives, researchers found that accounting professionals are more likely to be hired by a corporation if they express a willingness to fudge or tweak financial data in an effort to present a businesses’ finances in a more positive light.

The report’s authors — University of South Carolina Darla Moore School of Business professors Scott Jackson, Ling Harris and Joel Owens — concluded that when choosing a new hire, the individual picked by a recruiter “is characterized by a constellation of negative personality characteristics, which participants apparently accept in order to hire the job candidate who appears predisposed to manage earnings.”

Candidates that are more willing to manage earnings data are “much more likely to be hired in for-profit public companies,” the study found.

These conclusions were drawn from the survey, the results of which found that nearly 88 percent of participants, who were asked to choose between two potential new hires with similar professional backgrounds but contrasting values, chose the candidates with values that supported a willingness to bend the rules or fudge financial data for the purpose of achieving corporate goals.

Survey participants were asked to put themselves in a position of a recruiter for a public manufacturing firm looking to hire a new senior accounting manager.

Candidate A was described as willing to “rewrite the rules if necessary to achieve goals,” looks to a company’s existing corporate culture to determine acceptable behavior, believes in the importance of pleasing officials in a position of power, and “can find justifications for actions after the fact.”

Candidate B, on the other hand, believed rules “should not be circumvented to achieve goals,” held “rigid beliefs” about what is right and wrong in a corporation, and “prefers to avoid” justifying actions after the fact.

Candidate A held characteristics that a separate group of professionals found to suggest a willingness to manage earnings data. In a separate survey, the researchers found that Candidate B was considered to hold qualities of a better manager and a better fit for a nonprofit organization’s accounting team.

According to reports in Reuters, accounting researchers have speculated that this type of pattern among corporate recruiters has existed, and that employees that are willing to manipulate the numbers are more likely to succeed at their companies.

U.S. regulators, Reuters said, have been particularly concerned over earnings management. For example, reports touched on the practice of setting aside funds to cover potential litigation, then using those funds to “smooth their reported profit.” But according to the research report, “no amount of regulation may significantly curtail earnings management under such circumstances.”

In a statement announcing the findings, Jackson expressed shock at the implications of his research. “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,” he said.

The study emerges in a market climate in which stricter regulations and high-tech accounting Software-as-a-Service tools give corporate treasury professionals the ability to more accurately report financial data.

“In the changing regulatory and reporting landscape, being able to quickly and efficiently extract insights from data has become a necessity rather than a luxury,” declared a recent report from Treasury and Risk. “Corporate treasury and finance managers are coming under increasing pressure to adapt their reporting processes and infrastructure to take advantage of the ‘big data’ their organization is collecting.”

From cash flow visibility dashboards to travel and expense management services, innovators are introducing new ways to automate and collect data from a corporation’s finances. But according to the research from Jackson and his colleagues, these tools are not enough to combat corporate accounting inaccuracies.

Instead, it’s an issue that stems straight from corporate culture and the values of individual employees, the researchers found.

“Hopefully, showing that people and their values are at the root of this problem will help,” Jackson said.