Article2016

Real Earnings Management in Sales

Michael Ahearne · Jeffrey Patrick Boichuk · Craig J. Chapman · Thomas J. Steenburgh

41 citations0/0 files storedJournal of Accounting Research

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Auditing, Earnings Management, Governance Accounting and Organizational Management Corporate Governance and Financial Management

Abstract

We surveyed 1,638 sales executives across 40 countries regarding their companies’ likelihood of asking sales to perform real earnings management (REM) actions when earnings pressure exists. Using this information, which we refer to as companies’ REM propensities, we study how company characteristics and environmental conditions relate to the responses received. The use of cash-flow incentives for sales personnel and the distribution of interfunctional power in favor of finance rather than sales are both associated with companies’ REM propensities. In addition, we show that sales executives preemptively change their behaviors in anticipation of top management's REM requests. Sales executives working for public companies and companies in the United States reported higher levels of REM propensity. The data also support an association between REM propensity and finance–sales conflict. These findings and others are compared and contrasted with existing empirical and survey-based research on REM throughout the paper.

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References

1991Earnings Management During Import Relief Investigations 2005The economic implications of corporate financial reporting 2003Earnings Management through Real Activities Manipulation 2003Earnings management and investor protection: an international comparison 1999A Review of the Earnings Management Literature and Its Implications for Standard Setting 1985Of strategies, deliberate and emergent 2012Interviews – Learning the Craft of Qualitative Research Interviewing 1997Earnings management to avoid earnings decreases and losses

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