Bradley E. Lail’s research while affiliated with Baylor University and other places

This case is inspired by actual experiences within the accounting and accounts payable departments of a large energy company, formerly part of the S&P 500. The primary objective of the case is to provide a real-world scenario depicting the challenges that companies face in designing and implementing controls over financial reporting, as well as the challenges that external auditors face when evaluating audit findings. In completing the case, you will assume the role of a staff auditor on the audit engagement team for Herringbone Affiliates. The case includes discussion questions that have you consider the perspective of both company management and the audit team.

This study examines how the interplay between financial and nonfinancial measures (NFMs) affects management forecasting behavior. Building on the knowledge that NFMs are typically aligned with actual earnings and are likely incorporated into earnings forecasts, we investigate if the level of divergence between changes in NFMs and contemporaneous changes in earnings influences management forecasting behavior. We hand collect company-specific NFMs disclosed in 10-K filings and describe how a greater divergence between NFMs and earnings (i.e., NFM changes substantially outpacing earnings growth, or vice versa) is associated with greater uncertainty about the underlying business. As such, in more divergent settings, we observe that management is less likely to issue guidance. Consistent with our theory, for managers that do provide guidance in more divergent settings, management forecast errors increase. Last, we provide evidence that external stakeholders can use the level of divergence to predict future management forecasting behavior. JEL Classifications: G14; M40; M41. Data Availability: The data used in this study are publicly available from the sources indicated in the text.

Earnings management is a common term in the academic community and is likely understood by managers and professional investors, but how the large community of non-professional investors interprets this term is less clear. We examine non-professional investors’ attitudes toward earnings management and their resulting investing behaviors using a 2 × 2 mixed design. We manipulate investor role (prospective vs current) between participants and the method of earnings management within participants. We believe that different investment goals (prevention vs promotion) between current and prospective investors should lead to different investing behaviors. Consistent with our expectations, we find that current investors are more likely to maintain an equity than prospective investors are to invest in the same opportunity. Further, the consistent link between investors’ attitudes and actual investment behavior is only present for prospective investors. The prevention goal drives the current investors to maintain their investment, while the prospective investors remain more objective and focus on a goal of promotion. Importantly, prior research examining investor attitude toward earnings management has failed to link investors’ attitudes with actual investing decisions; our study attempts to fill this void by examining attitudes toward earnings management as well as subsequent investment behavior.

Earnings management is a common term in the academic community and is likely understood by managers and professional investors, but how the large community of non-professional investors interprets this term is less clear. We examine non-professional investors’ attitudes toward earnings management and their resulting investing behaviors using a 2 × 2 mixed design. We manipulate investor role (prospective vs current) between participants and the method of earnings management within participants. We believe that different investment goals (prevention vs promotion) between current and prospective investors should lead to different investing behaviors. Consistent with our expectations, we find that current investors are more likely to maintain an equity than prospective investors are to invest in the same opportunity. Further, the consistent link between investors’ attitudes and actual investment behavior is only present for prospective investors. The prevention goal drives the current investors to maintain their investment, while the prospective investors remain more objective and focus on a goal of promotion. Importantly, prior research examining investor attitude toward earnings management has failed to link investors’ attitudes with actual investing decisions; our study attempts to fill this void by examining attitudes toward earnings management as well as subsequent investment behavior.

We examine the role manager entrenchment has on firms’ financial reporting quality. More specifically, we test whether entrenched managers’ reported accruals deviate from industry norms and whether entrenched managers’ abnormal accruals are more (or less) predictive of future cash flows. Consistent with implications from prior research, we find that firms with entrenched managers generally report lower levels of abnormal accruals (in an absolute sense), but the abnormal accruals utilized by entrenched managers are more predictive of future cash flows. Contrary to a more traditional view of manager entrenchment, our evidence suggests that entrenched managers report higher quality abnormal accruals. While prior research provides evidence that manager entrenchment is associated with negative economic outcomes, we argue that attempts to limit entrenchment are unlikely to improve financial reporting quality and may actually lower quality. Future corporate governance research should consider not only the level but also the quality of the association between accounting choices and manager entrenchment. This article is protected by copyright. All rights reserved

Over the past decade, a number of accounting and financial reporting frauds have led to lost stock wealth, destroyed public trust, and a worldwide recession that called for necessary reform. Regulatory responses and systemic reforms quickly followed, and we show that, while necessary, these reforms are insufficient. The purpose of this paper is to forward virtuous professionalism as a necessary path toward restoring financial reporting systems. We take the position of external observer and analyze the accounting profession over time to assess what has transpired within our financial reporting systems. Our analysis reveals that the combined influence of commercialism and regulatory response has led to a systemic decline in accounting’s professional ideals and, as a result, an erosion of public trust. We then propose virtuous professionalism as a necessary process for restoring financial reporting systems based on sociological, professional, and philosophical theories. We argue that virtuous professionalism is necessary for restoring the public servant identity of the accounting professional. We conclude that efforts to restore financial reporting systems should begin with reforms that restore professional identity shaped by virtues.

Sarbanes–Oxley [SOX, hereafter] was expected to improve the overall quality of financial reporting. A large amount of research has documented the influence of SOX on companies' reporting behaviors and how those behaviors have impacted the capital market as a whole (Cohen et al., 2008; Engel et al., 2007; Lobo & Zhou, 2006). While the assumption is that the far-reaching regulation impacts all U.S.-listed companies, this paper considers whether SOX has had a differential impact on the earnings quality of foreign filers that cross-list on U.S. exchanges. Despite some minor exceptions, these foreign companies are expected to meet the same reporting standards as domestic U.S. companies. Using a sample of cross-listers around the enactment of SOX, the results suggest that cross-listed companies do not strictly comply with SOX. At the same time, a size-matched sample of domestic U.S. companies shows significant improvement across the same set of earnings quality measures. This differential impact raises concerns about the ability of domestic regulations to impose compliance on foreign filers. While some may believe that cross-listed companies are bonding themselves to U.S. regulations and reporting quality, the evidence in this paper suggests that foreign companies are more interested in the reputational gains associated with a listing in the U.S.