According to a study that was conducted firms jointly by Dutch and Australian researchers, accounting fraud is more prevalent in companies where the work culture encourages self-interest.
The anonymous survey surveyed 550 senior Dutch managers, mostly men, and found manipulations in everything from shifting funds between accounts to avoid overspending to delaying necessary spending.
Firms that were focused on their own success more than others were likely to have managers who received expensive performance incentives work contracts. This encouraged them to think about the effects of their actions on investors, shareholders and other employees.
Chair of Commerce Firms
Margaret Abernethy (Sir Douglas Copland Chair of Commerce at the Faculty of Business Economics at the University of Melbourne), Jan Bouwens and Laurence van Lent of CentER and Department of Accountancy, Tilburg University conducted the study.
Although the survey was conducted in The Netherlands, Professor Abernethy state that the problem is universal. There’s no reason for us to believe that our results don’t apply to managers or those in accounting and finance in Australia or other developed countries.
Julie Walker, Associate Professor of Accounting at University of Queensland, said that manipulation was likely just as common in Australia. The institutions of the two countries are not significantly different.
This is an important finding, because although we can affirm that accounting manipulation or earnings management is common, the study links that behavior to the culture of a firm rather than just looking at the economic stimulus for that behaviour in this instance the incentive contract. Professor Walker was not involve with the study.
Understand When Accounting
This is important because it allows us to understand. When accounting manipulations are most likely to occur, and how we can mitigate them.
Professor Abernethy stated that it was hard to change the work environment of a company’s ethical culture, but that a performance incentive contract could help mitigate some of the negative consequences of a self-centered approach.
Our study shows that ethical work environment in a company is strongly related to accounting manipulation incidents and the types of incentive agreements that firms choose to use.
Professor Bouwens stated that managers backgrounds were also important in how they perform their jobs. Managers with a certification-accountant background are less likely to manipulate accounts, all other things being equal.
This shows us that education and training can greatly reduce the chances of people engaging in unethical behavior. These programs teach accountants that it is in their best interests to not cross the line.
Study Had Implications Firms
Professor Abernethy stated that the study had implications on Boards of Management. Responsible for ensuring that firms embed cultural norms that promote ethical behaviour. This is important because it’s clear that the tone at the top can influence. The actions of employees within the company.
Professor Walker stated that getting rid of incentive contracts would only shift the problem and hide it. Senior managers often receive payoffs tied to firm performance, which can lead to poor earnings management. There is ample evidence to show that senior managers manipulate earnings to meet analyst forecasts.
This is a subtly distinct motivation from that provided by a performance incentive contract. The goal is to maintain the share price, not to maximize a performance bonus. Even if there are no performance-linked incentives, senior managers will still be assess on their financial performance.
I believe the key to solving the problem is the tone at the top, as the authors call it. It is clear that accounting manipulation can be reduce by good governance. This creates an open, transparent reporting environment and allows for greater monitoring of individual manager’s actions.