August 10, 2015 / 9:22 PM / 2 years ago

Corporate earnings management linked to accountant hiring: study

NEW YORK (Reuters) - When it comes to hiring accountants, U.S. public companies tend to favor people who show a willingness to flatter corporate profits by massaging the numbers, researchers have found.

In a study that suggests fighting corporate number-fudging is not just a matter of tweaking a few rules, accounting experts at the University of South Carolina said they surveyed 41 executive recruiters and 57 finance and accounting executives.

The participants were asked to choose between two candidates for an accounting job opening with similar backgrounds, but sharply contrasting values.

Nearly 88 percent of those surveyed chose candidates viewed as more congenial to bending the rules to achieve corporate goals, such as smoother earnings, according to the study.

“The selection process in firms may populate accounting positions with individuals who are predisposed to manage earnings,” the study said.

“No amount of regulation may significantly curtail earnings management under such circumstances,” it said.

Accounting researchers have speculated for years that individuals prone to earnings management are the most likely to rise to positions of power in corporate accounting departments.

Earnings management is a long-standing issue among U.S. corporations, which are sometimes held to account by regulators for it. For instance, some companies book excessive litigation reserves and later use those to smooth their reported profit.

In the study, candidates were often chosen who were inferior in just about every aspect of management, except their ability to remove roadblocks to reporting profit, the study found.

The authors said their research provided the first evidence that hiring contributes to persistent earnings management.

“It tells an important story about how the culture of earnings management perpetuates itself through the employee selection process,” said Joel Owens, one of the authors of the report and now an assistant accounting professor at the University of Nebraska-Lincoln.

The study was being presented this week at the American Accounting Association’s annual meeting in Chicago.

It was authored by University of South Carolina accounting professor Scott Jackson and colleagues.

Reporting by Dena Aubin; Editing by Kevin Drawbaugh and Matthew Lewis

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