Question

Despite regulatory reforms aimed at inhibiting aggressive financial reporting, earnings management persists and continues to concern practitioners, regulators, and standard setters. To provide insight into this practice and how to mitigate it, we conduct an experiment to examine the impact of two independent variables on CFOs' discretionary expense accruals. One independent variable, incentive conflict, is manipulated at two levels (present and absent)-i.e., the presence or absence of a personal financial incentive that conflicts with a corporate financial incentive. The other independent variable is CFOs' earnings management ethics ('EM-Ethics,' high vs. low), measured as their assessment of the ethicalness of key earnings management motivations. We find that incentive conflict and EM-Ethics interact to determine CFOs' discretionary accruals such that (a) in the presence of incentive conflict, CFOs with low (high) EM-Ethics tend to give into (resist) the personal incentive by booking higher (lower) expense accruals; and (b) in the absence of an incentive conflict, CFOs with low (high) EM-Ethics tend to give into (resist) the corporate incentive by booking lower (higher) expense accruals. We also find support for a mediated-moderation model in which CFOs' level of EM-Ethics influences their moral disengagement tendencies which, in turn, differentially affect their discretionary accruals, depending on the presence or absence of incentive conflict. Theoretical and practical implications of these findings are discussed

Mitigation: How would you, as CEO/CFO of a publicly traded manufacturing firm, mitigate the potential for serious corporate damage due to ethical and/or legal issues? Explain.

Process: What kind of process would you build into operations, culture, policy, and procedures to make sure your firm will not experience any ethical or legal issues?

Answer 1

If I was placed in a position such as a CEO or CFO of a publicly traded firm, the first way in which I would mitigate the potential for corporate damages would be to determine how these unethical practices went unnoticed. I would want to know if it was a company issues. Often times lack of training can lead to employees performing unethical tasks. After determining what led up to the serious unethical issues, I would begin by weeding out the employee’s that caused them. I would make sure to complete exit interviews to address whether or not the employees actually knew these issues to be unethical. I would ask them what caused them to perform unethically. This would be to ensure that it wasn’t encouraged by other employees to make sure all who were involved were brought to justice.

            In order to avoid additional ethical and or legal issues from presenting themselves within the organization, appropriate ethics training will be implemented. All employee’s will be required to go through semi-annual ethics training. This training will encompass what is right and or wrong, and what proper channels to follow in reporting suspicions of unethical practices. Policies and procedures will be put in place to discuss ways in combating ethical issues and these policies and procedures will be reviewed and updated on an annual basis or as needed.