Managerial Accounting

Experts and popular beliefs suggest that it pays to engage in financial misconduct due to lax enforcement and punishment after 2003. We focus on the most serious cases of financial reporting misconduct and hand collect data on three subsamples of severe misconduct cases, between 2003 and 2015: a sample of 37 (100) SEC enforcement actions (class action lawsuits) that explicitly allege fraud and a sample of 100 restatements with the most negative market reaction in which investors presumably suspect fraud.

We investigate the implementation of a 2014 Government of India mandate that requires companies to at least spend 2% of their profits on corporate social responsibility (CSR) activities. Firms that voluntarily engaged in CSR before the mandate reduce their spending significantly down to the suggested 2% level. Firms that did not actively engage in CSR before the mandate increase their spending marginally. CSR spending post mandate is highly sensitive to negative shocks to firm profits, but not to positive profit shocks.

While it is generally believed that insulating cost allocations help managers focus their attention on their own actions and shield them from the actions of others, non-insulating schemes can have appeal by encouraging teamwork and/or mutual monitoring among divisions. In this paper, we demonstrate that non-insulating allocations can induce fruitful cooperation among parties even when teamwork and mutual monitoring are nonissues.

Firms often use both objective/verifiable and subjective/non-verifiable performance measures to provide employees with effort incentives. We study a principal/two-agent model in which an objective team-based performance measure and subjective individual performance measures are available for contracting. A problem with tying rewards to subjective measures is that the principal may have incentives to understate the realization of those measures in order to reduce compensation. We compare two mechanisms for overcoming this credibility problem: bonus pools and reputation.

In a dynamic setting with demand following a random process, we ask how investment and operating decisions can be delegated to a manager with unknown time preferences. Only the manager observes the demand realization in each period and, therefore, has private information when choosing whether to acquire the productive asset and, subsequently, how to utilize it. We derive accrual accounting-based performance measures under which the manager will make the efficient decisions provided the investment date is exogenously given.

We ask nearly 400 CFOs about the definition and drivers of earnings quality, with a special emphasis on the prevalence and detection of earnings misrepresentation. CFOs believe that the hallmarks of earnings quality are sustainability, absence of one-time items, and backing by actual cash flows. Earnings quality is determined in about equal measure by controllable factors like internal controls and corporate governance, and non-controllable factors like industry membership and macroeconomic conditions.

In 2013, a new law required Indian firms, which satisfied certain size and profitability thresholds, to spend at least 2% of their net income on CSR. We exploit this natural experiment to isolate the shareholder value implications of CSR activities.

This essay analyzes some problems that accounting standard setters confront in erecting barriers to managers bent on boosting their firms' financial reports through financial engineering (FE) activities. It also poses some unsolved research questions regarding interactions between preparers and standard setters. It starts by discussing the history of lease accounting to illustrate the institutional disadvantage of standard setters relative to preparers in their speeds of response.

Aggregation, and minimizing associated information loss, is a pervasive theme in accounting. In contrast, this paper highlights some potential benefits of aggregation, using simple examples to illustrate ideas from a number of recent papers in a parsimonious manner. Aggregation rules can improve decision making because of their ability to convey appropriate information and because such rules may permit offsetting errors. Turning to control problems, aggregation has merit in the provision of both explicit and implicit incentives.