Ethically Related Judgments by Observers of Earnings Management

Merchant and Rockness (1994, p. 92) characterize earnings management as "probably the most important ethical issue facing the accounting profession" and provide initial evidence of the ethical judgments of various organizational members. The current study extends their work by examining the extent to which an individual's ethically-related judgments in response to earnings management activities are associated with the individual's role.In an experimental study, evening MBA students read three hypothetical scenarios involving a manager engaging in earnings management. The scenarios involved a gain from an operating activity, a gain from an accounting activity, and a loss from an accounting activity. Before reading the cases, however, participants were randomly assigned to one of three roles: a shareholder, another manager from the company who is unfamiliar with the manager in the case, or another manager from the company who is familiar with the manager in the case. Following each case, participants made four ethically related judgments.Participants assuming the role of another manager from the company who is unfamiliar with the manager in the case were expected to reach more unfavorable ethically related judgments than were shareholders or a manager who is familiar with the manager in the case. Generally, the results supported these predictions for accounting based earnings management activities but not for the operating based case.

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