When Executives Pledge Integrity: The Effect of the Accountant’s Oath on Firms’ Financial Reporting
Finance & Accounting
|Speaker:||Jonas Heese, Harvard Business School|
|Date:||Wednesday 3 March 2021|
|Time:||16:00 - 17:00|
|Location:||Online via Zoom (link available from J.Lashkor@exeter.ac.uk)|
We study the effect of executives’ pledges of integrity on firms’ financial reporting outcomes. Using a 2016 regulation that requires holders of Dutch professional accounting degrees to pledge an integrity oath with the objective to improve firms’ financial reporting quality, we identify chief executive officers (CEOs) and chief financial officers (CFOs) required to take this oath. We find that firms reduce income-increasing discretionary accruals by 1.9% of total assets after executives took the oath. These firms also reduce income-increasing discretionary expenditures by at least 4.4% of total assets, indicating that oath-taking executives reduce overall earnings management and not merely substitute accruals-based with real-activities earnings management. These effects are concentrated in firms where the CFO took the oath and hold during years of performance pressure. Further, the effect of the oath persists for approximately two years for discretionary expenditures and at least three years for discretionary accruals, indicating that integrity oaths can shape executives’ behavior over the short and medium terms. Overall, our results indicate that integrity oaths for executives can improve firms’ financial reporting outcomes.