Individual Intentions to Engage in Earnings Management Investigating the Role of Behavior Machiavellianism and Ethical Climate

Abstract

The recent spate of accounting scandals and the collapse of high-profile organizations have raised concerns regarding Earnings Management (EM) practices by accounting professionals and have brought considerable disrepute to organizations and societies. EM involves intentional manipulation of accounting numbers in the financial reporting by individuals to mislead some stakeholders or to achieve a strategic purpose. Despite strict regulatory reforms intending to restrain aggressive financial reporting, EM continues to persist and has become a matter of concern for standard setters, regulators, and practitioners. EM as a phenomenon is complex that does not solely depend on external pressures and internal incentives; rather it is more of an individual act involving a complex mix of personal and organizational contextual factors. However, a limited focus on individuals as a central element behind EM has restricted the ability to understand what drives the individual to cross ethical boundaries and indulge in EM. This research focuses on the individual perspective in EM and investigates the role of personal psychological factors and organizational Ethical Climate (EC) in influencing individuals intentions to engage in EM. Through an extant review of literature, a set of personal psychological factors have been identified within the theoretical lens of the Theory of Planned Behavior (TPB) (Ajzen, 1991) and the dark triad of personality theory (Christie and Geis, 1970). Further, through the theoretical lens of EC theory (Victor and Cullen, 1987), the model identifies the EC types as a likely moderator influencing individuals intentions to engage EM. After identifying the factors, possible relationships have been established between the variables, and a comprehensive EM behavior model has been proposed along with the corresponding hypotheses. Further, the questionnaire was developed using the existing scales from the literature. The sampling technique used was a combination of snowball and convenience sampling.