Influence of personality variables on German accountants' ethical judgments on earnings management

Purpose: The purpose of this research is to examine the influence of selected personality variables, namely Construal of Self and Regulatory Focus Theory, on the acceptance and the likelihood of German professional accountants engaging in earnings management. Originality: Previous research related to accounting ethics and earnings management has largely focused on Anglo-American countries. In addition, prior research has repeatedly examined the influence of national culture on judgments of accountants and has extensively relied on the dimensions developed by Hofstede. Evidence shows that important and relevant personality variables such as Construal of Self and Regulatory Focus Theory have a strong influence on judgments. Moreover, the examination of personality variables as related to controversial ethical issues in accounting is an underexplored topic. This research makes an original contribution to the literature by focusing on the influence of Construal of Self and Regulatory Focus Theory on ethical judgments of German professional accountants on earnings management. Key literature / theoretical perspective: Evidence shows that earnings management remains a serious and controversial issue in accounting. Imprecise accounting standards require extensive application of professional judgments by accountants and this may be applied in a way to mislead financial statement users. Importantly, earnings management is not necessarily illegal and as such, questions about the ethical judgments on earnings management require rigorous examination. Prior research, primarily from the psychology literature, shows that Construal of Self and Regulatory Focus Theory have strong influence on judgments. Importantly, the influence of these variables has largely been neglected in the literature related to ethical issues in accounting. Design/methodology/approach: The subjects of this research will be provided with earnings management scenarios and will be asked to evaluate the contextual variables embedded in the scenario on a Multidimensional Ethics Measure (MEM). Evidence shows that MEM is useful in capturing complex ethical judgments. Additionally, “holier-than-thou perception bias” of the subjects will be measured. Follow-up interviews will provide deeper insights. Research limitations/implications: The usual limitations of survey research apply. For instance, the scenarios may not fully depict ‘real-life-situations’. Moreover, the responses of the subjects may not be fully representative for non-respondents. In addition, personality is a complex construct and the two personality variables selected for this project may not fully capture all influences on individuals’ judgments. Practical and Social implications: Earnings management has serious implications for stakeholders such as governments, policy makers, investors and creditors who frequently make important economic decisions based on financial statement numbers. This research helps to provide useful insight into why professional accountants are likely to make specific ethical judgments about earnings management. The results will also be of interest to accounting professionals, accounting firms and accounting educators.