How prevalent is the accounting manipulation that chapters 9 and 10 deal with? Well, a recent survey of almost 1,000 Chief Financial Officers (CFOs), Chief Accounting Officers (CAOs), Controllers, and Chief Executive Officers (CEOs) gives some clues. The survey was registered in advance at the Journal of Accounting Research so the administrators could not alter it as they proceeded with the survey, giving it some integrity. It was sent to 7,500 executives of firms listed in the Russell 3000. The question asked if those executives were aware of their firm engaging in at least one incident in five categories in the past five years. Here are the percentages of those who replied Yes:
Real earnings management (altering operational activity to achieve a reporting goal): 18.0%
Accrual-based earnings management (manipulation of estimates in accruals): 6.6%
Obfuscating disclosures (making information difficult to understand): 8.8%
Withholding material information: 3.9%
Accounting fraud (reporting in violation of the law): 0.0%
Overall, 28.8% of executives surveyed admitted to at least one form of manipulation. Given that executives are presumably reluctant to admit to this behavior, the estimates are probably low.
See Cade, N., J. Gunn, and A. Vandenberg. 2024. Measuring the Prevalence of Earnings Manipulation: A Novel Approach. At https://ssrn.com/abstract=4937909. Forthcoming, Journal of Accounting Research.