Multiple control systems, accrual accounting, and earnings management
Article Abstract:
The coordination between a financial reporting system and a contracting system in a principal-agent model with managerial reporting incentives and moral hazard is analyzed by observing both economic earnings and reporting discretion. A trade-off between the two will show whether the owner should demand for 'truthful reporting' or 'earnings management' from the manager. Earnings management will serve to underscore any accruals-based economic-earnings manipulation done by the manager. The analysis showed that principals or owners utilize the contracting system to handle moral hazard over managerial effort whereas the financial reporting system makes the managers toe the line in economic-earnings reporting. It was predicted that a combination of truthful reporting and earnings management will be done in equilibrium.
Publication Name: Journal of Accounting Research
Subject: Business
ISSN: 0021-8456
Year: 1996
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Unobservable precision choices in financial reporting
Article Abstract:
Managers make audited estimates of future events that may sometimes contain uncertainties. A scenario wherein management privately agrees to a certain precision level prior to reporting and immediately after a public signal has been realized was called up to examine some aspects of managers' unobservable precision choices. The manager's financial report is deemed to be a number which exhibits an unbiased estimate of firm value that is not dependent on public signal. The drive to establish more precise information is thus shown as a function of future prospects where firms with poor prospects opt for more precise disclosures while firms with good prospects choose less precise disclosures.
Publication Name: Journal of Accounting Research
Subject: Business
ISSN: 0021-8456
Year: 1996
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