TY  - JOUR
AB  - Purpose The purpose of this paper is to examine how publicly available accounting risk metrics influence the aggressiveness of managers’ discretionary accounting decisions by making those decisions more transparent to the public.Design/methodology/approach The experiment used a 2 × 3 between-participants design, randomly assigning 122 financial reporting managers among conditions in which we manipulated whether the company was currently beating or missing analysts’ consensus earnings forecast and whether an accounting risk metric was indicative of low risk, high risk or a control. Participants chose whether to manage company earnings by deciding whether to report an amount of discretionary accruals that was consistent with the “best estimate” (i.e. no earnings management) or an amount above or below the best estimate.Findings Aggressive (income-increasing) earnings management is deterred when managers believe such behavior will cause their firm to be flagged as aggressive (i.e. high risk) by an accounting risk metric. Some managers attempt to “manage” the risk metric into an acceptable range through conservative (income-decreasing) earnings management. These results suggest that by making the aggressiveness of accounting choices more transparent, public risk metrics may reduce one type of earnings management (income-increasing), while simultaneously increasing another (income-decreasing).Research limitations/implications The operationalization of the manipulated variables of interest may limit the study’s generalizability.Practical implications Users of accounting risk metrics (e.g. investors, auditors, regulators) should be cautious when relying on such risk metrics that may be of limited reliability and usefulness due to managers’ incentives to manipulate their companies’ risk scores by being overly conservative in an effort to prevent being labeled “aggressive”.Originality/value By increasing the transparency of the aggressiveness of accounting choices, public risk metrics may reduce one type of earnings management (income-increasing), while simultaneously increasing another (income-decreasing).
VL  - 34
IS  - 8
SN  - 0268-6902
DO  - 10.1108/MAJ-07-2018-1955
UR  - https://doi.org/10.1108/MAJ-07-2018-1955
AU  - Hamilton Erin L.
AU  - Hirsch Rina M.
AU  - Rasso Jason T.
AU  - Murthy Uday S.
PY  - 2019
Y1  - 2019/01/01
TI  - The effects of a public indicator of accounting aggressiveness on managers’ financial reporting decisions
T2  - Managerial Auditing Journal
PB  - Emerald Publishing Limited
SP  - 986
EP  - 1007
Y2  - 2024/04/25
ER  -