Work

Accounting Manipulation, Peer Pressure, and Internal Control

Year: 2016

Type: article

Abstract: ABSTRACT We study firms' investment in internal controls to reduce accounting manipulation. We first show that peer managers' manipulation decisions are strategic complements: one manager manipulates more if he believes that reports of peer firms are more likely to be manipulated. As a result, one firm's investment in internal controls has a positive externality on peer firms. It reduces its own manager's manipulation, which, in turn, mitigates the manipulation pressure on managers at peer firms. Firms do not internalize this positive externality and, thus, underinvest in their internal controls over financial reporting. The problem of underinvestment provides one justification for regulatory intervention in firms' internal controls choices. JEL Classifications: G18; M41; M48; K22.

Source: The Accounting Review

DOI: 10.2139/ssrn.2767829

Authors: Pingyang Gao, Gaoqing Zhang

Institutions: University of Chicago, University of Hong Kong, University of Minnesota, Carnegie Mellon University

Language: English

Topic: Auditing, Earnings Management, Governance

Subfield: Accounting

Field: Business, Management and Accounting

Domain: Social Sciences

SDG: Peace, justice, and strong institutions

Open Access status: green

OpenAlex ID: W3124577611

FWCI: 10.97

Cites: 65

Cited by: 136

Related to: 10