forbes.com
Executive Survey Reveals High Prevalence of Undetected Earnings Manipulation
A study of 971 U.S. executives revealed that 27% admitted to manipulating earnings in the past five years, with the list experiment showing significantly higher rates of fraud (12%) and operational changes (30%) than the anonymous survey, highlighting the prevalence of undetected financial misconduct.
- What percentage of surveyed executives admitted to manipulating earnings, and what specific methods were employed?
- A recent study anonymously surveyed 971 executives from publicly traded U.S. companies, revealing that 27% admitted to manipulating earnings in the past five years. This manipulation included actions like changing operational activities to meet short-term targets (18%), obfuscating unfavorable information (9%), exploiting accounting standards (7%), and withholding material information (4%).
- What are the broader implications of these findings for investors, auditors, and regulators in terms of trust, oversight, and the need for reform?
- The findings indicate a potentially massive underestimation of earnings manipulation and accounting fraud. The prevalence of undetected manipulations highlights the need for increased skepticism from investors and more robust detection and deterrence efforts from auditors and regulators. This necessitates a reevaluation of current auditing and regulatory practices.
- How did the results of the anonymous survey differ from those of the list experiment, and what does this reveal about the limitations of traditional survey methods?
- The study employed a novel "list experiment" alongside an anonymous survey. While direct questioning yielded no admissions of accounting fraud, the list experiment showed significantly higher rates of fraud (12%) and operational activity changes for short-term gains (30%). This discrepancy suggests a considerable underreporting in traditional surveys.
Cognitive Concepts
Framing Bias
The framing emphasizes the prevalence of earnings manipulation, highlighting the "tip of the iceberg" problem and focusing on the high percentages reported in the study. While the information is accurate, the framing might lead readers to overestimate the pervasiveness of fraud relative to the overall business landscape.
Language Bias
The article uses strong language such as "manipulation," "fraudulent," and "mislead" to describe the actions of executives. While accurate, the language is emotionally charged and could influence readers' perceptions. More neutral terms such as "irregularities" or "accounting practices" could be considered in some instances.
Bias by Omission
The article focuses heavily on the findings of the study, but omits discussion of potential limitations of the study's methodology, such as response bias or the potential for executives to misinterpret the questions. It also doesn't explore alternative explanations for the observed behaviors, such as pressures from investors or industry competition.
False Dichotomy
The article presents a somewhat simplistic dichotomy between "manipulating earnings" and "not manipulating earnings." The reality is likely far more nuanced, with varying degrees of manipulation and different motivations behind them. This dichotomy could lead readers to oversimplify a complex issue.
Sustainable Development Goals
The prevalence of earnings manipulation and accounting fraud disproportionately affects smaller investors and exacerbates economic inequality. Manipulated financial reports mislead investors, potentially leading to unfair financial losses for those who rely on accurate information for investment decisions. This undermines fair market practices and contributes to wealth concentration.